Monopoly Insurance with Endogenous Information

Johan Lagerlof and Christoph Schotmüller
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Christoph Schotmüller: Department of Economics, Tilburg University

No 13-15, Discussion Papers from University of Copenhagen. Department of Economics

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: asymmetric information; information acquisition; insurance; screening; adverse selection (search for similar items in EconPapers)
JEL-codes: D82 I13 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2013-11-26
New Economics Papers: this item is included in nep-com, nep-cta, nep-ias and nep-mic
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Working Paper: Monopoly Insurance with Endogenous Information (2013)
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