Abstract
The present paper investigates the adverse selection problem by examining the relationship between accident occurrences and deductible choice utilizing a seemingly unrelated probit model that allow...
Highlights
Theoretical studies of insurance markets have extensively underlined the potential importance of asymmetric information and documented its undesirable implications on the development and sustainability of the insurance industry
We test the presence of exogeneity by applying maximum-likelihood simultaneous estimations of the two probit equations, a method identified as recursive bivariate probit, proposed by Maddala and Lee (1976) and Maddala (1983) and discussed and applied by Greene (1998, 2003) or as a seemingly unrelated probit model with endogenous dummy variables by Fabbri, Monfardini, and Radice (2004)
This paper examines the presence of the adverse selection problem by investigating the relationship between accident occurrences and the deductible choice
Summary
Theoretical studies of insurance markets have extensively underlined the potential importance of asymmetric information and documented its undesirable implications on the development and sustainability of the insurance industry. The current article contributes to the literature by examining the adverse selection problem by investigating the relationship between accident occurrences and deductible choices utilizing a seemingly unrelated probit model that allows for best controls for unobserved heterogeneity and endogeneity. While this microeconometric analysis does not consider a multivariate model and considers only two types of contracts (high and low deductibles), it does suggest important implications from applying a recursive bivariate probit.
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