Optimal insurance with adverse selection and comonotonic background risk

David Alary and Franck Bien
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David Alary: LERNA - Economie des Ressources Naturelles - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - INRA - Institut National de la Recherche Agronomique - CEA - Commissariat à l'énergie atomique et aux énergies alternatives
Franck Bien: LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

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Abstract: In this note, we consider an adverse selection problem involving an insurance market à la Rothschild-Stiglitz. We assume that part of the loss is uninsurable as in the case with health care or environmental risk. We characterize sufficient conditions such that adverse selection by itself does not distort competitive insurance contracts. A sufficiently large uninsurable loss provides an incentive to high-risk policy holders not to mimic low-risk policy holders without distorting the optimal coverage.

Keywords: Adverse Selection; Background risk; Optimal Contract (search for similar items in EconPapers)
Date: 2019-12-02
New Economics Papers: this item is included in nep-cta, nep-hea, nep-ias, nep-rmg and nep-upt
Note: View the original document on HAL open archive server: https://hal.science/hal-02390017v1
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