Full insurance, asymmetric information and genetic testing

José Penalva

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: This paper extends previous resuls on optimal insurance trading in the presence of a stock market that allows continuous asset trading and substantial personal heterogeneity, and applies those results in a context of asymmetric information with references to the role of genetic testing in insurance markets. We find a novel and surprising result under symmetric information: agents may optimally prefer to purchase full insurance despite the presence of unfairly priced insurance contracts, and other assets which are correlated with insurance. Asymmetric information has a Hirschleifer-type effect which can be solved by suspending insurance trading. Nevertheless, agents can attain their first best allocations, which suggests that the practice of restricting insurance not to be contingent on genetic tests can be efficient.

Keywords: Insurance; asymmetric information; genetic testing; portfolio choice (search for similar items in EconPapers)
JEL-codes: D81 D82 G11 G22 (search for similar items in EconPapers)
Date: 2000-11
New Economics Papers: this item is included in nep-fmk and nep-mic
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Related works:
Journal Article: Insurance with Frequency Trading: A Dynamic Analysis of Efficient Insurance Markets (2001)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:461

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