Limited Competition, Information Asymmetry, and Organizational Forms

Abstract

The theory of information asymmetry has explained the coexistence of stock and mutual companies in the insurance market. However, there is discrepancy between the theory and empirical findings. This paper proposes a simple theory to fill the gap between the theory and empirical findings. Our approach is to modify the theory of information asymmetry by incorporating limited competition. Using the Evolutionary Stable Equilibrium, we show that the coexistence or existence of mutuals only (stocks only, resp.) can be an evolutionary stable outcome even in a high risk line (a low risk line). We find that two additional factors are important in explaining the results: (i) the relative size of advantage of each organizational form and (ii) history (or the starting population of companies).