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Adverse selection, competition, and linear self-insurance

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  • Dan Anderberg

    (Department of Economics, Lund University, Sweden)

Abstract

A two-class insurance model is analysed. In addition to a competitive insurance market, the households can use a simple linear self-insurance technology. Using the recently proposed Coalition Proof Equilibrium with Private Information due to Kahn and Mookherjee (1995) the insurance market equilibrium is found to be either separating or pooling. There may be profits in equilibrium. The self-insurance option can, but does not necessarily, promote more efficient allocation of consumption; self-insurance may be dysfunctional, lowering welfare. The model is applied to a competitive private pension market where the households in addition can save in a bequeathable asset.

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Bibliographic Info

Article provided by Finnish Economic Association in its journal Finnish Economic Papers.

Volume (Year): 12 (1999)
Issue (Month): 1 (Spring)
Pages: 3-15

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Handle: RePEc:fep:journl:v:12:y:1999:i:1:p:3-15

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Web page: http://www.taloustieteellinenyhdistys.fi
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  1. Picard, Pierre, 1987. "On the design of incentive schemes under moral hazard and adverse selection," Journal of Public Economics, Elsevier, vol. 33(3), pages 305-331, August.
  2. Eckstein, Zvi & Eichenbaum, Martin & Peled, Dan, 1985. "Uncertain lifetimes and the welfare enhancing properties of annuity markets and social security," Journal of Public Economics, Elsevier, vol. 26(3), pages 303-326, April.
  3. Hellwig, Martin, 1987. "Some recent developments in the theory of competition in markets with adverse selection ," European Economic Review, Elsevier, vol. 31(1-2), pages 319-325.
  4. Arnott, Richard & Stiglitz, Joseph E, 1991. "Moral Hazard and Nonmarket Institutions: Dysfunctional Crowding Out or Peer Monitoring?," American Economic Review, American Economic Association, vol. 81(1), pages 179-90, March.
  5. 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.
  6. Ehrlich, Isaac & Becker, Gary S, 1972. "Market Insurance, Self-Insurance, and Self-Protection," Journal of Political Economy, University of Chicago Press, vol. 80(4), pages 623-48, July-Aug..
  7. Engers, Maxim & Fernandez, Luis F, 1987. "Market Equilibrium with Hidden Knowledge and Self-selection," Econometrica, Econometric Society, vol. 55(2), pages 425-39, March.
  8. Wilson, Charles, 1977. "A model of insurance markets with incomplete information," Journal of Economic Theory, Elsevier, vol. 16(2), pages 167-207, December.
  9. Eichenbaum, Martin S & Peled, Dan, 1987. "Capital Accumulation and Annuities in an Adverse Selection Economy," Journal of Political Economy, University of Chicago Press, vol. 95(2), pages 334-54, April.
  10. Kahn Charles M. & Mookherjee Dilip, 1995. "Coalition Proof Equilibrium in an Adverse Selection Insurance Economy," Journal of Economic Theory, Elsevier, vol. 66(1), pages 113-138, June.
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