An Economic Analysis of ‘Explanation Investment’ in the Insurance Market

Abstract

This paper investigates explanation investments in a vertically differentiated insurance market. Our main findings reveal that cooperative explanation investment cannot be voluntarily realized because a high-quality insurance firm wishes to deviate from cooperative explanation investment; producer welfare increases with cooperative explanation investment; consumer welfare decreases with cooperative explanation investment; and social welfare decreases with cooperative explanation investment. Thus, it is undesirable in terms of social welfare to implement rules and/or mechanisms aimed at realizing cooperative explanation investment.