Monopoly, Heterogeneous Beliefs and Imperfect Information: The Insurance Market

Ogaku Michiko ()
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Ogaku Michiko: Faculty of Economics, Nagasaki University, 4-2-1 Katafuchi, Nagasaki, Japan

Asia-Pacific Journal of Risk and Insurance, 2020, vol. 14, issue 1, 10

Abstract: This paper questions how heterogeneity of beliefs about the probability of loss affects equilibrium insurance contracts, firm behavior, and welfare focusing especially on the effect of optimism when a monotonicity property, which is a major assumption of prior work, is violated. This paper shows that optimistic individuals could result in insurance driving out individuals who exert effort, if the fraction of such optimistic individuals is significantly large. In addition, this paper shows that optimism could have negative effects on profits of the firm even though both parties realize the asymmetry in beliefs. These results are not only consistent with empirical evidence from several insurance markets on correlation of risk and coverage, but also simply align themselves with empirical evidence on the tendencies of people to be unrealistically optimistic.

Keywords: heterogeneous beliefs; moral hazard; adverse selection (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1515/apjri-2018-0030

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