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Consumer Risk Perceptions and Information in Insurance Markets with Adverse Selection

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  • James A. Ligon

    (Department of Economics, Finance and Legal Studies, University of Alabama, 35487 Tuscaloosa AL)

  • Paul D. Thistle

    (Department of Economics, Western Michigan University, 49008 Kalamazoo MI)

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    Abstract

    Standard models of adverse selection in insurance markets assume policyholders know their loss distributions. This study examines the nature of equilibrium and the equilibrium value of information in competitive insurance markets where consumers lack complete information regarding their loss probabilities. We show that additional private information is privately and socially valuable. When the equilibrium policies separate types, policyholders can deduce the underlying probabilities from the contracts, so it is information on risk type, rather than loss probability per se, that is valuable. We show that the equilibrium is “as if” policyholders were endowed with complete knowledge if, and only if, information is noiseless and costless. If information is noisy, the equilibrium depends on policyholders' prior beliefs and the amount of noise in the information they acquire. The Geneva Papers on Risk and Insurance Theory (1996) 21, 191–210. doi:10.1007/BF00941938

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    Bibliographic Info

    Article provided by Palgrave Macmillan in its journal The Geneva Papers on Risk and Insurance Theory.

    Volume (Year): 21 (1996)
    Issue (Month): 2 (December)
    Pages: 191-210

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    Handle: RePEc:pal:genrir:v:21:y:1996:i:2:p:191-210

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    Web page: http://www.palgrave-journals.com/

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    Cited by:
    1. Michael Hoy & Peter Lambert, . "Genetic Screening and Price Discrimination in Insurance Markets," Discussion Papers 99/25, Department of Economics, University of York.
    2. Matthias Messner & Mattias K. Polborn, 1999. "Information and Dynamic Adjustment in Life Insurance Markets," UWO Department of Economics Working Papers 9912, University of Western Ontario, Department of Economics.

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