Loss aversion leading to advantageous selection

Christina Aperjis () and Filippo Balestrieri ()
Additional contact information
Christina Aperjis: Power Auctions LLC
Filippo Balestrieri: Analysis Group

Journal of Risk and Uncertainty, 2017, vol. 55, issue 2, No 5, 203-227

Abstract: Abstract Some insurance markets are characterized by “advantageous selection”, that is, ex-post risk and coverage are negatively correlated. We show that expectation-based loss aversion as in Kőszegi and Rabin (Quarterly Journal of Economics, 121(4), 1133–1165, 2006; The American Economic Review, 97(4), 1047–1073, 2007) provides a natural explanation for this phenomenon in environments in which risk aversion models do not, e.g., when agents face modest-scale risks and/or in absence of moral hazard. More exposure to risk has two competing effects on an agent’s willingness to pay for insurance: a positive effect, as in standard expected utility models; and a negative one, due to a reference effect. We determine conditions under which an insurance provider optimally sets a high price at which only low risk agents buy.

Keywords: Loss aversion; Advantageous selection; Insurance; Risk (search for similar items in EconPapers)
JEL-codes: D11 D42 D81 D82 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11166-017-9269-8 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:jrisku:v:55:y:2017:i:2:d:10.1007_s11166-017-9269-8

Ordering information: This journal article can be ordered from
http://www.springer. ... ry/journal/11166/PS2

DOI: 10.1007/s11166-017-9269-8

Access Statistics for this article

Journal of Risk and Uncertainty is currently edited by W. Kip Viscusi

More articles in Journal of Risk and Uncertainty from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().