Adverse Selection and Possibility of Constructing Consistant Informational Contracts

The existence of asymmetric information leads to adverse selection. In the last decade alternative theories had been developed to prevent it in markets especially insurance markets. According to these theories in
surers can categorize their customers using insurance market signaling to avoid adverse selection externalities such as cross-subsidization among customers with different risk levels.
The present study utilizes collected data and testing the signaling and cross- subsidizing hypothesis in the IACIM (Iranian Automobile Collision Insurance Market). The results show that the hypothesis of the existence of signaling mechanism in automobile collision insurance market could not be rejected but the hypothesis of the existence of cross-subsidizing customers with different risk levels on the criterion of deductible premium level was rejected.
JEL Classification: G14, G22, D82, D86