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Optimal risk-sharing under adverse selection and imperfect risk perception

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  • Arnold Chassagnon
  • Bertrand Villeneuve

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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Bibliographic 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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References

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  1. Meglena Jeleva & Bertrand Villeneuve, 2004. "Insurance contracts with imprecise probabilities and adverse selection," Economic Theory, Springer, vol. 23(4), pages 777-794, May.
  2. Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, vol. 55(1), pages 95-115, January.
  3. David Schmeidler, 1989. "Subjective Probability and Expected Utility without Additivity," Levine's Working Paper Archive 7662, David K. Levine.
  4. Edward C Prescott & Robert M Townsend, 2010. "Pareto Optima and Competitive Equilibria With Adverse Selection and Moral Hazard," Levine's Working Paper Archive 2069, David K. Levine.
  5. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  6. Henriet, Dominique & Rochet, Jean-Claude, 1987. "Price regulation in insurance markets with asymmetric information," Economics Letters, Elsevier, vol. 24(4), pages 327-329.
  7. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
  8. Doherty, Neil A & Eeckhoudt, Louis, 1995. "Optimal Insurance without Expected Utility: The Dual Theory and the Linearity of Insurance Contracts," Journal of Risk and Uncertainty, Springer, vol. 10(2), pages 157-79, March.
  9. Briys, Eric P & Louberge, Henri, 1985. " On the Theory of Rational Insurance Purchasing: A Note," Journal of Finance, American Finance Association, vol. 40(2), pages 577-81, June.
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Cited by:
  1. 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.
  2. Giuseppe, DE FEO & Jean, HINDRIKS, 2005. "Efficiency of Competition in Insurance Markets with Adverse Selection," Discussion Papers (ECON - Département des Sciences Economiques) 2005042, Université catholique de Louvain, Département des Sciences Economiques.

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