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Monopoly Insurance with Endogenous Information

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  • Johan N.M. Lagerlöf

    (Department of Economics, Copenhagen University)

  • Christoph Schotmüller

    (Department of Economics, Tilburg University)

Abstract

We study a monopoly insurance model with endogenous information acquisition. Through a continuous effort choice, consumers can determine the precision of a privately observed signal that is informative about their accident risk. The equilibrium effort is, depending on parameter values, either zero (implying symmetric information) or positive (implying privately informed consumers). Regardless of the nature of the equilibrium, all offered contracts, also at the top, involve underinsurance. The reason is that underinsurance at the top discourages information gathering. We identify a sorting effect that explains why the insurer wants to discourage information acquisition. Moreover, a public policy that decreases the information gathering costs can hurt both parties. Lower information gathering costs can harm consumers because the insurer adjusts the optimal contract menu in an unfavorable manner.

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Bibliographic Info

Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 13-15.

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Length: 38 pages
Date of creation: 26 Nov 2013
Date of revision:
Handle: RePEc:kud:kuiedp:1315

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Keywords: asymmetric information; information acquisition; insurance; screening; adverse selection;

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  1. Szalay, Dezsö, 2009. "Contracts with endogenous information," Games and Economic Behavior, Elsevier, Elsevier, vol. 65(2), pages 586-625, March.
  2. Shi, Xianwen, 2012. "Optimal auctions with information acquisition," Games and Economic Behavior, Elsevier, Elsevier, vol. 74(2), pages 666-686.
  3. Leemore S. Dafny, 2010. "Are Health Insurance Markets Competitive?," American Economic Review, American Economic Association, American Economic Association, vol. 100(4), pages 1399-1431, September.
  4. Khalil, F & Rochet, J-C, 1997. "Contracts and Productive Information Gathering," Working Papers, University of Washington, Department of Economics 97-16, University of Washington, Department of Economics.
  5. Bardey, David & De Donder, Philippe, 2012. "Genetic testing with primary prevention and moral hazard," TSE Working Papers, Toulouse School of Economics (TSE) 12-320, Toulouse School of Economics (TSE).
  6. Lagerlöf, Johan N. M. & Schottmüller, Christoph, 2013. "Facilitating Consumer Learning in Insurance Markets—What Are the Welfare Effects?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9753, C.E.P.R. Discussion Papers.
  7. Cremer, Jacques & Khalil, Fahad, 1992. "Gathering Information before Signing a Contract," American Economic Review, American Economic Association, American Economic Association, vol. 82(3), pages 566-78, June.
  8. Nicola Persico, 1997. "Information Acquisition in Auctions," UCLA Economics Working Papers, UCLA Department of Economics 762, UCLA Department of Economics.
  9. Stiglitz, Joseph E, 1977. "Monopoly, Non-linear Pricing and Imperfect Information: The Insurance Market," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 44(3), pages 407-30, October.
  10. Doherty, Neil A. & Thistle, Paul D., 1996. "Adverse selection with endogenous information in insurance markets," Journal of Public Economics, Elsevier, Elsevier, vol. 63(1), pages 83-102, December.
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