Economics Homework Help

Economics – Game Theory

1.Progressive auto insurance and other insurance companies are

considering charging customers based on the number of miles they drive and other driving behavior (like frequent quick acceleration or hard braking). Data on this behavior would be collected via an onboard monitoring system. One UC Berkeley economist, Aaron Edlin, thinks that such devices and payment schemes should be mandated by the state. He claims that “insurance companies have some limited incentive to adopt pay-as-you-drive insurance — if they want to be a niche company and specialize in serving low mileage drivers.” (San Jose Mercury News). Why does Edlin see companies that require the devices becoming “niche” players? How is this an example of adverse selection? How would a state mandate solve the problem?