Optimal insurance under adverse selection and ambiguity aversion

Kostas Koufopoulos () and Roman Kozhan ()
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Kostas Koufopoulos: University of Piraeus
Roman Kozhan: University of Warwick

Economic Theory, 2016, vol. 62, issue 4, No 2, 659-687

Abstract: Abstract We consider a model of competitive insurance markets under asymmetric information with ambiguity-averse agents who maximize their maxmin expected utility. The interaction between asymmetric information and ambiguity aversion gives rise to some interesting results. First, for some parameter values, there exists a unique pooling equilibrium where both types of insurees buy full insurance. Second, in separating equilibria where the low risks are underinsured, their equilibrium contract involves more coverage than under standard expected utility. Finally, due to the endogeneity of commitment to the menus offered by insurers, our model has always an equilibrium which is unique (in terms of allocation) and interim incentive efficient (second-best).

Keywords: Adverse selection; Ambiguity aversion; Endogenous commitment (search for similar items in EconPapers)
JEL-codes: D82 G22 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s00199-015-0926-3

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