Advantageous Selection in Insurance Market

David de Meza and David Webb ()

Discussion Papers from University of Exeter, School of Business and Economics

Abstract: This paper reverses the standard conclusion that asymmetric information plus competition results in insufficient insurance provision. Risk-tolerant individuals take few precautions and are disinclined to insure, but are drawn into a pooling equilibrium by the low premiums created by the presence of safer, more risk-averse types. Taxing insurance drives out the reckless clients, allowing a strict Pareto gain. This result depends on administrative costs in processing claims and issuing policies, as does the novel finding of a pure-strategy, partial-pooling, sub-game-perfect, Nash equilibrium in the insurance market.

Keywords: INFORMATION; COMPETITION; INSURANCE; RISK (search for similar items in EconPapers)
JEL-codes: D82 D83 E53 (search for similar items in EconPapers)
Date: 2000
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Journal Article: Advantageous Selection in Insurance Markets (2001)
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