To Insure or Not to Insure? Promoting Trust and Cooperation with Insurance Advice in Markets

39 Pages Posted: 24 Jul 2021 Last revised: 16 Sep 2021

See all articles by Ben Grodeck

Ben Grodeck

Monash University

Franziska Tausch

Max Planck Institute for Research on Collective Goods

Erte Xiao

Monash University

Chengsi Wang

Department of Economics, University of Mannheim

Date Written: July 23, 2021

Abstract

We design a novel insurance advice mechanism aimed at promoting trust and cooperation in markets with asymmetric information. In a buyer-seller game, sellers are given the option to advise buyers on whether to purchase third-party insurance against the potential losses from the opportunistic behavior of strategic sellers. The theoretical model suggests that both cooperative and strategic sellers will advise buyers not to purchase the insurance. Once this advice has been given, strategic sellers are less likely to pursue self-interest due to the associated psychological costs. We conduct a controlled laboratory experiment and show that the insurance advice mechanism significantly increases market efficiency, with sellers being more likely to cooperate with buyers and buyers being more likely to purchase from the seller. Furthermore, we find that the insurance advice mechanism is more effective when sellers can observe buyers’ insurance purchase decisions.

Keywords: asymmetric information, insurance, trust, cooperation, experimental economics

JEL Classification: C91, D9, D47, D82, L86

Suggested Citation

Grodeck, Ben and Tausch, Franziska and Xiao, Erte and Wang, Chengsi, To Insure or Not to Insure? Promoting Trust and Cooperation with Insurance Advice in Markets (July 23, 2021). Available at SSRN: https://ssrn.com/abstract=3892011 or http://dx.doi.org/10.2139/ssrn.3892011

Ben Grodeck (Contact Author)

Monash University ( email )

900 Dandenong Road
Caulfield East, 3145
Australia

Franziska Tausch

Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany

Erte Xiao

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Chengsi Wang

Department of Economics, University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

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