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Optimal risk-sharing under adverse selection and imperfect risk perception

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Author Info
Arnold Chassagnon
Bertrand Villeneuve

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Abstract

The present paper thoroughly explores second-best efficient allocations in an insurance economy with adverse selection. We start with a natural extension of the classical model, assuming less than perfect risk perception. We characterize the constraints on efficient redistribution, and we summarize the incidence of incentives on the economy with the notions of weak and strong adverse selection. Finally, we show in what sense improving risk perception enhances welfare.

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File URL: http://economics.ca/cgi/xms?jab=v38n3/14.pdf
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Publisher Info
Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 38 (2005)
Issue (Month): 3 (August)
Pages: 955-978
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Handle: RePEc:cje:issued:v:38:y:2005:i:3:p:955-978

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  1. DE FEO, Giuseppe & HINDRIKS, Jean, 2005. "Efficiency of competition in insurance markets with adverse selection," CORE Discussion Papers 2005054, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
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  2. Amy Finkelstein & Kathleen McGarry, 2006. "Multiple Dimensions of Private Information: Evidence from the Long-Term Care Insurance Market," American Economic Review, American Economic Association, vol. 96(4), pages 938-958, September. [Downloadable!]
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This page was last updated on 2009-11-25.

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