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Research of two‐period insurance contract model with a low compensation period under adverse selection

Ben‐jiang Ma, Jing‐yu Ye, Yuan‐ji Huang and Muhammad Farhan Bashir

Managerial and Decision Economics, 2020, vol. 41, issue 3, 293-307

Abstract: The phenomenon of adverse selection caused by asymmetric information dominates the insurance market. In this paper, based on principal‐agent theory, we establish a two‐period dynamic insurance contract model with a low compensation period. This model introduces the tools of a low compensation period and the increase and decrease in the bonus to identify the risk types of policyholders. We prove that this model can achieve a strict Pareto improvement relative to the two‐period static insurance contract model with a low compensation period. Moreover, we also graphically analyze the conclusion, which can help insurance companies to design more comprehensive insurance contracts.

Date: 2020
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Handle: RePEc:wly:mgtdec:v:41:y:2020:i:3:p:293-307