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DOUBLE-SIDED ADVERSE SELECTION IN THE PRODUCT MARKET AND THE ROLE OF THE INSURANCE MARKET*

Authors

  • S. Hun Seog

    1. Seoul National University
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    • 1

      The author thanks the participants in the American Risk and Insurance Association meeting in 2001 and Asia-Pacific Risk and Insurance Association meeting in 2002 for their comments. The author also thanks Thi Nha Chau for her support. Please address correspondence to: S. Hun Seog, KAIST Business School, Korea Advanced Institute of Science and Technology (KAIST), 207-43 Cheongryangri-Dong Dongdaemun-Gu, Seoul, 130-012, Korea. Phone: +82-2-958-3527. Fax: 782-2-958-3160. E-mail: seogsh@business.kaist.ac.kr.


  • *

    Manuscript received January 2007; revised January 2008.

Abstract

I investigate the interrelation between a product market and an insurance market when adverse-selection problems exist both in consumers and in firms. Firms offer warranties for product failures. Consumers may further purchase first-party insurance for the residual risks of product failures. Given that the insurance market exists, two types of equilibria are possible: (a) Different firm types offer different pooling warranties attracting both good and bad consumer types or (b) good firms attract only bad consumers and bad firms attract both types of consumers. I discuss the existence and the efficiency implication of the insurance market.

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