Evidence on Adverse Selection: Equilibrium Signaling and Cross-Subsidization in the Insurance Market.

The configuration of equilibrium in the market for automobile collision insurance is examined empirically by representing the premium-deductible menu and the demand function as a standard hedonic system. Using contractual data from a representative insurer, the authors estimate a reduced-form hedonic premium equation and the inverse of the marginal bid equation for insurance coverage. The data reveal an equilibrium with adverse selection and market signaling but lead the authors to reject the hypothesis that high risks receive contracts subsidized by low risks. Copyright 1994 by University of Chicago Press.