Welfare-improving ambiguity in insurance markets with asymmetric information

Kostas Koufopoulos and Roman Kozhan

Journal of Economic Theory, 2014, vol. 151, issue C, 551-560

Abstract: We consider a model of competitive insurance markets involving both asymmetric information and ambiguity about the accident probability. We show that there can exist a full-insurance pooling equilibrium. We also present an example where an increase in ambiguity leads to a strict Pareto improvement. Higher ambiguity relaxes high-risks' incentive compatibility constraint and allows low risks to buy more insurance. Higher ambiguity also deteriorates low risks' expected utility from holding an uncertain prospect. If the former effect dominates, the expected utility of low risks increases and given that high risks' utility remains unaffected, the increase in ambiguity implies a strict Pareto improvement.

Keywords: Ambiguity aversion; Asymmetric information; Welfare improvement (search for similar items in EconPapers)
JEL-codes: D82 G22 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:151:y:2014:i:c:p:551-560

DOI: 10.1016/j.jet.2013.11.003

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