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Information design in competitive insurance markets

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  • Garcia, Daniel
  • Tsur, Matan

Abstract

This paper characterizes the optimal information structure in competitive insurance markets with adverse selection. We consider a regulator that assigns ratings to individuals according to their expected costs. Insurers observe these ratings and compete as in Akerlof (1970). The optimal rating system minimizes ex-ante risk subject to participation constraints. We prove that in any such market there exists a unique optimal system under which all individuals trade and the ratings match low-cost types with high-cost types negative assortatively. We provide a simple algorithm that yields the optimal system and examine implications for government regulations of insurance markets.

Suggested Citation

  • Garcia, Daniel & Tsur, Matan, 2021. "Information design in competitive insurance markets," Journal of Economic Theory, Elsevier, vol. 191(C).
    • Handle: RePEc:eee:jetheo:v:191:y:2021:i:c:s0022053120301538
    DOI: 10.1016/j.jet.2020.105160
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    References listed on IDEAS

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    Cited by:

    1. Furkan Sezer & Hossein Khazaei & Ceyhun Eksin, 2021. "Maximizing Social Welfare and Agreement via Information Design in Linear-Quadratic-Gaussian Games," Papers 2102.13047, arXiv.org, revised Feb 2023.
    2. Anton Kolotilin & Roberto Corrao & Alexander Wolitzky, 2022. "Persuasion with Non-Linear Preferences," Papers 2206.09164, arXiv.org, revised Aug 2022.

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    More about this item

    Keywords

    Insurance markets; Adverse selection; Information design;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D60 - Microeconomics - - Welfare Economics - - - General
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private

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