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Adverse Selection in an Insurance Market With Government-Guaranteed Subsistence Levels

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  • Bum J. Kim
  • Harris Schlesinger

Abstract

We consider a competitive insurance market with adverse selection. Unlike the standard models, we assume that individuals receive the benefit of some type of potential government assistance that guarantees them a minimum level of wealth. For example, this assistance might be some type of government-sponsored relief program, or it might simply be some type of limited liability afforded via bankruptcy laws. Government assistance is calculated "ex post" of any insurance benefits. This alters the individuals' demand for insurance coverage. In turn, this affects the equilibria in various insurance models of markets with adverse selection. Copyright The Journal of Risk and Insurance.

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Article provided by The American Risk and Insurance Association in its journal The Journal of Risk and Insurance.

Volume (Year): 72 (2005)
Issue (Month): 1 ()
Pages: 61-75

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Handle: RePEc:bla:jrinsu:v:72:y:2005:i:1:p:61-75

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  1. Louis Kaplow, 1989. "Incentives and Government Relief for Risk," NBER Working Papers 3007, National Bureau of Economic Research, Inc.
  2. Spence, Michael, 1978. "Product differentiation and performance in insurance markets," Journal of Public Economics, Elsevier, vol. 10(3), pages 427-447, December.
  3. Wilson, Charles, 1977. "A model of insurance markets with incomplete information," Journal of Economic Theory, Elsevier, vol. 16(2), pages 167-207, December.
  4. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
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Cited by:
  1. Brunette, Marielle & Couture, Stéphane, 2008. "Public compensation for windstorm damage reduces incentives for risk management investments," Forest Policy and Economics, Elsevier, vol. 10(7-8), pages 491-499, October.
  2. Mette Ejrnaes & Stefan Hochguertel, 2008. "Entrepreneurial Moral Hazard in Income Insurance," Tinbergen Institute Discussion Papers 08-065/3, Tinbergen Institute, revised 12 Aug 2011.
  3. Paul Raschky & Hannelore Weck-Hannemann, 2007. "Charity hazard - A real hazard to natural disaster insurance," Working Papers 2007-04, Faculty of Economics and Statistics, University of Innsbruck.
  4. Paul A. Raschky & Reimund Schwarze & Manijeh Schwindt & Ferdinand Zahn, 2010. "Uncertainty of Governmental Relief and the Crowding out of Insurance," Development Research Unit Working Paper Series 05-10, Monash University, Department of Economics.
  5. Mette Ejrnaes & Stefan Hochguertel, 2008. "Entrepreneurial Moral Hazard in Income Insurance," Tinbergen Institute Discussion Papers 08-065/3, Tinbergen Institute, revised 12 Aug 2011.
  6. Ming Chang & Chiu Lin & Dachrahn Wu, 2008. "Piracy and limited liability," Journal of Economics, Springer, vol. 95(1), pages 25-53, October.
  7. Mette Ejrnæs & Stefan Hochguertel, 2008. "Entrepreneurial Moral Hazard in Income Insurance: Empirical Evidence from a Large Administrative Sample," CAM Working Papers 2008-02, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics.
  8. Marielle Brunette & Laure Cabantous & Stéphane Couture & Anne Stenger, 2013. "The impact of governmental assistance on insurance demand under ambiguity: a theoretical model and an experimental test," Theory and Decision, Springer, vol. 75(2), pages 153-174, August.
  9. Paul Raschky & Reimund Schwarze & Manijeh Schwindt & Ferdinand Zahn, 2013. "Uncertainty of Governmental Relief and the Crowding out of Flood Insurance," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 54(2), pages 179-200, February.
  10. Marielle Brunette & Stephane Couture, 2007. "Effects of Public Compensation for Disaster Damages on Private Insurance and Forest Management Decisions," Working Papers - Cahiers du LEF 2007-06, Laboratoire d'Economie Forestiere, AgroParisTech-INRA.

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