Full insurance, asymmetric information and genetic testing
AbstractThis paper extends previous resuls on optimal insurance trading in the presence of a stock market that allows continuous asset trading and substantial personal heterogeneity, and applies those results in a context of asymmetric information with references to the role of genetic testing in insurance markets. We find a novel and surprising result under symmetric information: agents may optimally prefer to purchase full insurance despite the presence of unfairly priced insurance contracts, and other assets which are correlated with insurance. Asymmetric information has a Hirschleifer-type effect which can be solved by suspending insurance trading. Nevertheless, agents can attain their first best allocations, which suggests that the practice of restricting insurance not to be contingent on genetic tests can be efficient.
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Bibliographic InfoPaper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 461.
Date of creation: Nov 2000
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Insurance; asymmetric information; genetic testing; portfolio choice;
Other versions of this item:
- Jose S. Penalva Zuasti, 2001. "Insurance with Frequency Trading: A Dynamic Analysis of Efficient Insurance Markets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(4), pages 790-822, October.
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2000-05-16 (All new papers)
- NEP-FMK-2000-05-16 (Financial Markets)
- NEP-MIC-2000-05-16 (Microeconomics)
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