The Problem of Asymmetric Information: A Simulation of How Insurance Markets Can Be Inefficient

David L. Eckles and Martin Halek

Risk Management and Insurance Review, 2007, vol. 10, issue 1, 93-105

Abstract: The concept of adverse selection is discussed in virtually all academic insurance textbooks. However, undergraduate students have rarely had the experience of purchasing insurance which may limit their ability to fully comprehend the market inefficiencies created by asymmetric information. We provide a classroom simulation of an insurance market that highlights the concept of adverse selection and its impact on the insurance industry. Participants are asked to make insurance decisions in pursuit of their own interests under different market conditions. In the absence of perfect information, participants actively observe that a socially optimal outcome does not occur.

Date: 2007
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https://doi.org/10.1111/j.1540-6296.2007.00108.x

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Persistent link: https://EconPapers.repec.org/RePEc:bla:rmgtin:v:10:y:2007:i:1:p:93-105

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