Implementability in Insurance Markets with Adverse Selection

Maria Andraos and Mario Ghossoub

Papers from arXiv.org

Abstract: We consider an insurance market with hidden information, where the agent's type is private information and is drawn from an arbitrary type space. We study implementability of a collection of retention functions, namely, how to select premium schedules so that the resulting menu of contracts is incentive compatible, or truthful. Specifically, for general type spaces, implementability is equivalent to cyclical monotonicity of the collection of retention functions. For compact interval type spaces, we show that submodularity is a sufficient condition for implementability, under suitable type ordering assumptions. Moreover, for any implementable collection of retention functions, we characterize all corresponding premium schedules, up to a common additive constant. Finally, we apply our results to several standard classes of insurance contracts, for which the general implementability conditions admit simpler characterizations, and we provide several numerical illustrations.

Date: 2026-09, Revised 2026-10
New Economics Papers: this item is included in nep-des and nep-mic
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