Optimal Insurance: Dual Utility, Random Losses, and Adverse Selection

Alex Gershkov, Benny Moldovanu, Philipp Strack and Mengxi Zhang

American Economic Review, 2023, vol. 113, issue 10, 2581-2614

Abstract: We study a generalization of the classical monopoly insurance problem under adverse selection (see Stiglitz 1977) where we allow for a random distribution of losses, possibly correlated with the agent's risk parameter that is private information. Our model explains patterns of observed customer behavior and predicts insurance contracts most often observed in practice: these consist of menus of several deductible-premium pairs or menus of insurance with coverage limits–premium pairs. A main departure from the classical insurance literature is obtained here by endowing the agents with risk-averse preferences that can be represented by a dual utility functional (Yaari 1987).

JEL-codes: D81 D82 D86 D91 G22 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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DOI: 10.1257/aer.20221247

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