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Experimental evidence on coverage choices and contract prices in the market for corporate insurance

Published online by Cambridge University Press:  14 March 2025

Gautam Goswami ,
Martin F. Grace  and
Michael J. Rebello
Gautam Goswami
Affiliation:
Department of Finance, Graduate School of Business, Fordham University, 113 West 60th Street, New York, NY 10023
Martin F. Grace
Affiliation:
Department of Risk Management and Insurance, Robinson College of Business, Georgia State University, University Plaza, Atlanta, GA 30303
Michael J. Rebello
Affiliation:
A. B. Freeman School of Business, Tulane University, Goldring/Woldenberg Hall, 7 McAlister Drive, New Orleans, LA 70118
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Abstract

In this paper, we present experimental evidence on the effect adverse selection has on coverage choices and pricing in corporate insurance markets. Two sets of experimental data, each generated by experiments utilizing a specific parameterization of a corporate insurance decision, are presented to gauge these effects. In the first, subject behavior conforms to a unique equilibrium in which high risk firms choose higher coverage and contracts are priced accordingly. Insurers act competitively and convergence to equilibrium behavior is marked. In the second set, there is little evidence that subject behavior is consistent with either of the two equilibrium outcomes supported by the experimental setting—pooling by fully insuring losses and pooling by self insuring.

Keywords

InsuranceAdverse selectionExperimental evidence

JEL classification

G22: Insurance • Insurance Companies • Actuarial Studies C90: General G14: Information and Market Efficiency • Event Studies • Insider Trading
Type
Research Article
Information
Experimental Economics , Volume 11 , Issue 1 , March 2008 , pp. 67 - 95
Copyright
Copyright © 2007 Economic Science Association

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Footnotes

Electronic Supplementary Material Supplementary material is available in the online version of this article at http://dx.doi.org/10.1007/s10683-006-9152-y.

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