Optimal Insurance: Dual Utility, Random Losses and Adverse Selection

Alex Gershkov (), Benny Moldovanu (), Philipp Strack () and Mengxi Zhang ()
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Alex Gershkov: Department of Economics and the Federmann Center for the Study of Rationality, The Hebrew University of Jerusalem, and School of Economics, University of Surrey
Benny Moldovanu: Department of Economics, University of Bonn
Philipp Strack: Department of Economics, Yale University, New Haven
Mengxi Zhang: Departmentof Economics, University of Bonn

No 242, ECONtribute Discussion Papers Series from University of Bonn and University of Cologne, Germany

Abstract: We study a generalization of the classical monopoly insurance problem under adverse selection (see Stiglitz [1977]) where we allow for a random distribution of losses, possibly correlated with the agent’s risk parameter that is private information. Our model explains patterns of observed customer behavior and predicts insurance contracts most often observed in practice: these consist of menus of several deductible-premium pairs, or menus of insurance with coverage limits-premium pairs. A main departure from the classical insurance literature is obtained here by endowing the agents with risk-averse preferences that can be represented by a dual utility functional (Yaari [1987]).

Pages: 40 pages
Date: 2023-06
New Economics Papers: this item is included in nep-cta, nep-mic, nep-rmg and nep-upt
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:ajk:ajkdps:242

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