Information design in competitive insurance markets

Daniel Garcia and Matan Tsur

Journal of Economic Theory, 2021, vol. 191, issue C

Abstract: This paper characterizes the optimal information structure in competitive insurance markets with adverse selection. We consider a regulator that assigns ratings to individuals according to their expected costs. Insurers observe these ratings and compete 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-cost types with high-cost types negative assortatively. We provide a simple algorithm that yields the optimal system and examine implications for government regulations of insurance markets.

Keywords: Insurance markets; Adverse selection; Information design (search for similar items in EconPapers)
JEL-codes: D60 D81 D86 I13 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:191:y:2021:i:c:s0022053120301538

DOI: 10.1016/j.jet.2020.105160

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