LEARNING AND EVIDENCE IN INSURANCE MARKETS

Kym Pram

International Economic Review, 2023, vol. 64, issue 4, 1685-1714

Abstract: I analyze a model of monopoly insurance contracting where the consumer has access to endogenous, costly evidence of his risk type. I characterize when the consumer is worse off if the insurer is allowed to condition contracts on evidence and when the ability to contract on evidence leads to a Pareto improvement. I compare the results to an analogous setting with perfect competition: Under perfect competition, when evidence acquisition costs are low, the ability to contract on evidence is always Pareto improving. For intermediate costs, I uncover a new source of unraveling.

Date: 2023
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