Abstract
We document a large and persistent anomaly in the UK car insurance market over the period 2012–13: insurance companies charged a higher premium for third-party (liability) insurance than comprehensive insurance (which includes third party). Furthermore, some companies charged higher premiums for comprehensive policies with larger deductibles. In contrast to current theories of adverse or propitious selection, our evidence suggests both that consumers are too confused or too poorly informed to arbitrage between policy types and that sellers of car insurance do not implement the incentive-compatibility constraints at the heart of consumer demand theory. This particular insurance market is much less sophisticated than that characterized by modern microeconomic theory.
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