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Optimal insurance under adverse selection and ambiguity aversion

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Publication details

JournalEconomic theory
DateAccepted/In press - 8 Oct 2015
DateE-pub ahead of print - 19 Oct 2015
DatePublished (current) - Oct 2016
Issue number4
Volume62
Number of pages29
Pages (from-to)659–687
Early online date19/10/15
Original languageEnglish

Abstract

We consider a model of competitive insurance markets under asymmetric information with ambiguity-averse agents who maximize their maxmin expected utility. The interaction between asymmetric information and ambiguity aversion gives rise to some interesting results. First, for some parameter values, there exists a unique pooling equilibrium where both types of insurees buy full insurance. Second, in separating equilibria where the low risks are underinsured, their equilibrium contract involves more coverage than under standard expected utility. Finally, due to the endogeneity of commitment to the menus offered by insurers, our model has always an equilibrium which is unique (in terms of allocation) and interim incentive efficient (second-best).

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© Springer-Verlag Berlin Heidelberg 2015. This is an author-produced version of the published paper. Uploaded in accordance with the publisher’s self-archiving policy. Further copying may not be permitted; contact the publisher for details.

    Research areas

  • Adverse selection, Ambiguity aversion, Endogenous commitment

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