Homework Clinic
Social Science Clinic => Economics => Microeconomics => Topic started by: fox on Jul 21, 2019
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Why can car insurance companies charge higher auto rates for new customers than for established customers, all else held constant?
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The insurance company faces an asymmetric information problem with a new customer—they do not know whether the person is a good driver or whether they are careful about how they take care of their car. After a few years of not getting any "bad news" about the driver the insurance company can afford to reduce its rates and still earn zero economic profits.