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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

Abstract: 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)
Date: 2006-01-20
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