Policy Documents

The Efficiency of Categorical Discrimination in Insurance Markets

Casey Rothschild –
June 1, 2011

Crocker and Snow (1986) show that banning categorization based on riskrelated characteristics such as gender or race in pricing insurance policies is inefficient whenever categorization is costless. Their analysis, by contrast, suggests ambiguous welfare effects of banning costly categorization. I show that this latter conclusion is incorrect: categorical pricing bans are inefficient even when categorization is costly. Whenever the ban-imposing government can instead provide breakeven partial social insurance, it can remove its ban in such a way that the insurance market will choose to employ the categorizing technology only when doing so is Pareto improving.