 Insurance as a lemons market: Coverage denials and poolingHector Chade and Edward Schlee Journal of Economic Theory, 2020, vol. 189, issue C Abstract: The standard monopoly insurance model with adverse selection implies that there are always gains to trade, that only the best (unobservable) risks can go uninsured, and that a profit-maximizing menu cannot pool all types. We show that insurance-provision costs can explain both coverage denials only to those likely to be the worst risks and complete pooling. Specifically, we prove a general comparative statics theorem formalizing coverage denials only to those deemed to be the worst risks; and two theorems showing that the insurer offers a single contract (complete pooling), with either zero or positive coverage. We point out some implications of these results for empirical work on insurance. Our results expand upon a point made by Hendren (2013), that the main effect of adverse selection on insurance might not be misallocation in active markets – the traditional emphasis after Rothschild and Stiglitz (1976) – but simply in shutting down markets, as in Akerlof (1970) classic lemons model. Keywords: Adverse selection; Insurance; Loading; Coverage denials; Pooling (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:189:y:2020:i:c:s0022053120300806 DOI: 10.1016/j.jet.2020.105085 Access Statistics for this article Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell More articles in Journal of Economic Theory from Elsevier |
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