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The Consequences for a Monopolistic Insurance Firm of Evaluating Risk Better than Customers: The Adverse Selection Hypothesis Reversed

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Author Info

  • Bertrand Villeneuve

    (Institut d'Economie Industrielle, Universit� de Toulouse 1, Place Anatole France, 31042 Toulouse cedex, France, e-mail: villeneu@cict.fr)

Abstract

This article models a situation in which a monopolistic insurer evaluates risk better than its customers. The resulting equilibrium allocations are compared to the consequences of the standard adverse selection hypothesis. On the positive side, they exhibit the property that low-risk people are better covered than higher-risk people. On the normative side, the article shows that there are two reasons for avoiding excessive risk classification: one is the classical destruction of insurance possibilities, and the other comes from the distrustful atmosphere generated by new asymmetric information. The Geneva Papers on Risk and Insurance Theory (2000) 25, 65–79. doi:10.1023/A:1008749524517

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Bibliographic Info

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

Volume (Year): 25 (2000)
Issue (Month): 1 (June)
Pages: 65-79

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Handle: RePEc:pal:genrir:v:25:y:2000:i:1:p:65-79

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Cited by:
  1. Amy Finkelstein & Kathleen McGarry, 2003. "Private Information and its Effect on Market Equilibrium: New Evidence from Long-Term Care Insurance," NBER Working Papers 9957, National Bureau of Economic Research, Inc.
  2. Jeleva, Meglena & Villeneuve, Bertrand, 2004. "Insurance contracts with imprecise probabilities and adverse selection," Economics Papers from University Paris Dauphine 123456789/5358, Paris Dauphine University.
  3. Kostas Koufopoulos, 2002. "Asymmetric information, heterogeneity in risk perceptions and insurance: an explanation to a puzzle," LSE Research Online Documents on Economics 24906, London School of Economics and Political Science, LSE Library.
  4. Leonidas Enrique de la Rosa, 2007. "Overconfidence and Moral Hazard," Economics Working Papers 2007-08, School of Economics and Management, University of Aarhus.
  5. Deryugina, Tatyana, 2012. "Does Selection in Insurance Markets Always Favor Buyers?," MPRA Paper 53583, University Library of Munich, Germany.
  6. Villeneuve, Bertrand, 2000. "Life Insurance," Economics Papers from University Paris Dauphine 123456789/5369, Paris Dauphine University.
  7. Daniel McFadden & Carlos Noton & Pau Olivella, 2012. "Remedies for Sick Insurance," Working Papers 620, Barcelona Graduate School of Economics.
  8. Villeneuve, Bertrand, 2005. "Competition between insurers with superior information," Economics Papers from University Paris Dauphine 123456789/5356, Paris Dauphine University.
  9. Wu, T.C. Michael & Yang, C.C., 2012. "The welfare effect of income tax deductions for losses as insurance: Insured- versus insurer-sided adverse selection," Economic Modelling, Elsevier, vol. 29(6), pages 2641-2645.
  10. Philippe Donder & Jean Hindriks, 2009. "Adverse selection, moral hazard and propitious selection," Journal of Risk and Uncertainty, Springer, vol. 38(1), pages 73-86, February.

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