Consumer lock-in with asymmetric information

Abstract

A two-period version of the Rothschild and Stiglitz (1976)model of competitive screening in an insurance market is presented. Its features include: repeat purchase of insurance among consumers; no commitment among insurers or consumers; asymmetric information among insurers about a consumer's accident history; and state-contingent contracts. An equilibrium may exist in this model with full pooling in period one and consumer lock-in in period two. In such an equilibrium, high-risk consumers are experience-rated and firms earn negative profits in period one and positive profits in period two.