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.:
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The Geneva Risk and Insurance Review,
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"On the Role of Good Faith in Insurance Contracting,"
Princeton Economic Theory Working Papers, David K. Levine
26c6897fd1cd46f8f39ffb6ca, David K. Levine.
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