The Market for Lemons: Costly Insurance, Coverage Denials, and Pooling

Hector Chade
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Hector Chade: arizona state university

No 1097, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: We introduce costly insurance provision into a standard monopoly insurance model with adverse selection, where the consumer has private information about the probability of suffering a loss. We obtain two main results that do not arise in the standard model. First, we derive a general comparative statics result about coverage denial only to those likely to be the worst risks. Second, we show that the optimal menu the insurer offers can entail complete pooling of all types. We also show that these results do not hold in a costly provision version of the competitive model of Rothschild-Stiglitz. Finally, we discuss the implications of these results for empirical work on insurance with adverse selection.

Date: 2016
New Economics Papers: this item is included in nep-com, nep-ias and nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:1097

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