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An insurance contract with a low compensation period under adverse selection

Author

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  • Ma, Ben-jiang
  • Qiu, Chun-guang
  • Bi, Wen-jie

Abstract

Adverse selection has a significant influence on trading efficiency in insurance markets. Inspired by the quality identification function of the probation period in the secondhand car market, an insurance contract with a low compensation period is designed. It is proved that the contract can distinguish the risk types of the policyholders to achieve a separating equilibrium. And it can make a strict Pareto improvement to the traditional partial insurance contract under certain conditions. Finally, an example is given to demonstrate the conclusions.

Suggested Citation

  • Ma, Ben-jiang & Qiu, Chun-guang & Bi, Wen-jie, 2015. "An insurance contract with a low compensation period under adverse selection," Information Economics and Policy, Elsevier, vol. 31(C), pages 67-74.
    • Handle: RePEc:eee:iepoli:v:31:y:2015:i:c:p:67-74
    DOI: 10.1016/j.infoecopol.2015.04.005
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    References listed on IDEAS

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    1. Dionne, Georges & Doherty, Neil A, 1994. "Adverse Selection, Commitment, and Renegotiation: Extension to and Evidence from Insurance Markets," Journal of Political Economy, University of Chicago Press, vol. 102(2), pages 209-235, April.
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    Cited by:

    1. Ben‐jiang Ma & Jing‐yu Ye & Yuan‐ji Huang & Muhammad Farhan Bashir, 2020. "Research of two‐period insurance contract model with a low compensation period under adverse selection," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 41(3), pages 293-307, April.

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    More about this item

    Keywords

    Adverse selection; Asymmetric information; Separating equilibrium; Pareto improvement;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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