Information Design in Insurance Markets: Selling Peaches in a Market for Lemons

Daniel Garcia, Roee Teper and Matan Tsur

No 6853, CESifo Working Paper Series from CESifo

Abstract: This paper characterizes the optimal information structure in competitive insurance markets with adverse selection. A regulator assigns ratings to individuals according to their risk characteristics, insurers offer fixed insurance contracts to each rating group, and the market clears as in Akerlof (1970). The optimal rating system minimizes ex-ante risk subject to participation constraints. We prove that in any such market there exists a unique optimal system under which all individuals trade and the ratings match low risk types with high risk types negative assortatively. A simple algorithm yields the optimal system. We examine implications for government regulations of insurance markets.

Keywords: insurance markets; adverse selection; information design (search for similar items in EconPapers)
JEL-codes: D82 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-ias
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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