In an early debate,Tryfo(1980)shows that in a captive market where the number of insureds remains the same,the profitability of insurer will not be affected by the number of risk classes used.On the contrary,based on classical oligopoly models,Doherty(1981)argues that additional risk classification is able to create economic rent in the short run.But the competitive pressure in the long run,which depends on reaction function of competitors,may drive the excess profit away.From abstract approach,Hoy(1982)proves the possibility of welfare improvement by using imperfect information to categorize risk classes.Crocker and Snow(1986),focusing on the cost of information,show that any market equilibrium with costless categorization is Pareto dominates the equilibrium in which categorization is not allowed.However,when the acquisition of information is costly,the market can be an efficient mechanism without categorization.Recently, Polborn,Hoy and Sadanand(2006)analyze the regulatory adverse selection when the use of new information of riskis prohibited by government.They prove that such regulation still may increase welfare.
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