EconPapers    
Economics at your fingertips  
 

Insurance, self-control, and contract flexibility

Heiner Schumacher

European Economic Review, 2016, vol. 83, issue C, 220-232

Abstract: 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)
Date: 2016
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)
http://www.sciencedirect.com/science/article/pii/S0014292116300010
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

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 ().

 
Page updated 2017-12-23
Handle: RePEc:eee:eecrev:v:83:y:2016:i:c:p:220-232