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Facilitating Consumer Learning in Insurance Markets - What Are the Welfare Effects?

Johan Lagerlof () and Christoph Schottmüller

No 13-12, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: What are the welfare effects of a policy that facilitates for insurance customers to privately and covertly learn about their accident risks? We endogenize the information structure in Stiglitz's classic monopoly insurance model. We first show that his results are robust: For a small information acquisition cost c, the consumer gathers information and the optimal contracts are close to the ones in the Stiglitz model. If c is so low that the consumer already gathers information (c c*, marginally reducing c hurts the insurer and weakly benefits the consumer. Paradoxically, a reduction in c that is "successful," meaning that the consumer gathers information after the reduction but not before it, can hurt both parties. The reasons for this are that, after the reduction, (i) the cost is actually incurred and (ii) the contracts can be more distorted.

Keywords: asymmetric information; information acquisition; insurance; screening; adverse selection (search for similar items in EconPapers)
JEL-codes: D82 I13 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2013-11-11
New Economics Papers: this item is included in nep-com and nep-cta
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http://www.econ.ku.dk/english/research/publications/wp/dp_2013/1312.pdf (application/pdf)

Related works:
Journal Article: Facilitating Consumer Learning in Insurance Markets: What Are the Welfare Effects? (2018) Downloads
Working Paper: Facilitating Consumer Learning in Insurance Markets—What Are the Welfare Effects? (2013) Downloads
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