The Welfare Effects of Discrimination in Insurance
Rob van der Noll ()
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Rob van der Noll: CPB Netherlands Bureau for Economic Policy, and Erasmus Universiteit Rotterdam
No 06-012/1, Tinbergen Institute Discussion Papers from Tinbergen Institute
We study an insurance model characterized by a continuum of risk types, private information and a competitive supply side. We use the model to investigate the welfare effects of discrimination (also known as risk selection). We postulate that a test is available that determines whether an applicant's risk exceeds a treshold. Excluding the highest risks softens adverse selection, but constitutes a welfare loss for the high risks. In contrast to a lemons market intuition, we find that aggregate surplus decreases when risk aversion is high. When risk aversion is low however, discrimination increases aggregate surplus.
Keywords: insurance; adverse selection; risk selection; discrimination (search for similar items in EconPapers)
JEL-codes: D82 K29 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20060012
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