Insurance, self-control, and contract flexibility
European Economic Review, 2016, vol. 83, issue C, 220-232
We study a competitive insurance market in which some consumers have too optimistic expectations regarding their future use of preventive measures. When contracts are long-term and inflexible, such naive consumers would increase the costs of insurance for low-risk consumers. The competitive insurance market therefore offers flexible contracts that allow for switching between different tariffs. Sophisticated consumers choose a partial insurance tariff and remain low-risks. Naive consumers choose the same tariff, but later switch to full insurance, and become high-risks. If there are sufficiently many naive consumers, they pay a transfer to sophisticated consumers (so that high-risks subsidize low-risks). In contrast, there are no such transfers when contracts are short-term. The model generates novel implications for the time frame of insurance contracts and insurance requirements.
Keywords: Insurance; Moral hazard; Hyperbolic discounting; Sophistication (search for similar items in EconPapers)
JEL-codes: D82 D91 G22 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:83:y:2016:i:c:p:220-232
Access Statistics for this article
European Economic Review is currently edited by T.S. Eicher, A. Imrohoroglu, E. Leeper, J. Oechssler and M. Pesendorfer
More articles in European Economic Review from Elsevier
Series data maintained by Dana Niculescu ().