Adverse Selection and Insurance Contracting: A Rank-Dependent Utility Analysis

Ryan Matthew Joseph () and Rhema Vaithianathan
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Ryan Matthew Joseph: University of Auckland

The B.E. Journal of Theoretical Economics, 2003, vol. 3, issue 1, 20

Abstract: Stiglitz (1977) established three well-known features of monopoly insurance markets subject to adverse selection: (i) at least one market segment is served, despite the informational asymmetry; (ii) there is always some screening of risk classes; and (iii) efficiency is sacrificed to achieve screening. We modify Stiglitz's model, replacing his expected utility assumption on consumer behavior with a version of Quiggin's (1982) rank-dependent utility model that has received strong experimental support. We show that none of the conclusions (i)--(iii) is robust to this revision. In particular, asymmetric information need not lead to any loss in efficiency.

Keywords: Insurance; Rank-Dependent Utility; Adverse Selection (search for similar items in EconPapers)
Date: 2003
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Citations: View citations in EconPapers (2)

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DOI: 10.2202/1534-5971.1074

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