Monopoly Insurance with Endogenous Information

Johan Lagerlof and Schottmüller, Christoph
Authors registered in the RePEc Author Service: Christoph Schottmüller

No 9774, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study a monopoly insurance model with endogenous information acquisition. Through a continuous effort choice, consumers can determine the precision of a privately observed signal that is informative about their accident risk. The equilibrium effort is, depending on parameter values, either zero (implying symmetric information) or positive (implying privately informed consumers). Regardless of the nature of the equilibrium, all offered contracts, also at the top, involve underinsurance. The reason is that underinsurance at the top discourages information gathering. We identify a sorting effect that explains why the insurer wants to discourage information acquisition. Moreover, a public policy that decreases the information gathering costs can hurt both parties. Lower information gathering costs can harm consumers because the insurer adjusts the optimal contract menu in an unfavorable manner.

Keywords: Adverse selection; Asymmetric information; Information acquisition; Insurance; Screening (search for similar items in EconPapers)
JEL-codes: D82 I13 (search for similar items in EconPapers)
Date: 2013-12
New Economics Papers: this item is included in nep-com, nep-cta, nep-ias, nep-ind and nep-mic
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