The Welfare Effects of Discrimination in Insurance
AbstractWe study an insurance model characterized by a continuum of risk types, private information and a competitive supply side. We use the model to investigate the welfare effects of discrimination (also known as risk selection). We postulate that a test is available that determines whether an applicant's risk exceeds a treshold. Excluding the highest risks softens adverse selection, but constitutes a welfare loss for the high risks. In contrast to a lemons market intuition, we find that aggregate surplus decreases when risk aversion is high. When risk aversion is low however, discrimination increases aggregate surplus.
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Bibliographic InfoPaper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 06-012/1.
Date of creation: 20 Jan 2006
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insurance; adverse selection; risk selection; discrimination;
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- K29 - Law and Economics - - Regulation and Business Law - - - Other
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-03-05 (All new papers)
- NEP-IAS-2006-03-05 (Insurance Economics)
- NEP-LAW-2006-03-05 (Law & Economics)
- NEP-MIC-2006-03-05 (Microeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Michael Hoy & Peter Lambert, .
"Genetic Screening and Price Discrimination in Insurance Markets,"
99/25, Department of Economics, University of York.
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- 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.
- A. Dixit & P. Picard, 2002.
"On the Role of Good Faith in Insurance Contracting,"
THEMA Working Papers
2002-01, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
- A. Dixit & P. Picard, 2002. "On the Role of Good Faith in Insurance Contracting," Princeton Economic Theory Working Papers 26c6897fd1cd46f8f39ffb6ca, David K. Levine.
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