Testing the Transmission Mechanism Hypothesis in The Iranian Insurance Industry: A Link Between Competition, Efficiency and Soundness

Document Type : Research Paper

Authors

1 Ph.d Student in Economics, University of Sistan and Baluchestan, Iran

2 Associate Professor in Economics, University of Sistan and Baluchestan, Iran

3 Associate Professor in Economics, University ofSistan and Baluchestan., Iran

10.29252/jep.9.18.231

Abstract

 
 
 
 
This paper aims to contribute to the literature of industrial organization by conducting an analysis in the insurance industry on the effects of competition on soundness, where efficiency is considered as a transmission mechanism through which competition can contribute to soundness. Testing the transmission mechanism hypothesis is an appropriate approach for evaluating the effect of competition on the financial soundness. Using this hypothesis, which is introduced by Schaeck and Cihak, the competition can improve the financial stability. According to the industrial organization literature, increase of competition can lead to more efficiency and, as a result, to the improvement of financial stability. The figures indicate that the Boon indicator is a significant and negative variable, which confirms the hypothesis. In other word, the efficiency serves as a channel though which competition is converted to soundness.  

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References

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The Journal of Economic Policy
Volume 9, Issue 18
May 2017
Pages 231-244

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