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Adverse selection in an insurance pool

Author

Listed:
  • Biais, Bruno
  • Christian Gollier

Abstract

In this paper, we reconsider the Rothschild-Stiglitz equilibrium of an insurance market under adverse selection. We examine the case in which insurers have heterogenous private information about the policyholder's type. This raises the problem of the transmission of information among insurers. Two types of perfect bayesian equilibria may exist depending upon whether the first line of insurers is able to discriminate risks or not, knowing that the second line of insurers which provide complementary insurance have some information on their own. There are two ways by which complementary insurers can get additional information. First, primary insurers can deny insurance to some consumers, thereby signalling their own information to the market. Second, some consumers may prefer not to purchase insurance from primary insurers. This also conveys some information to the market. We show that the prohibition of the pooling of information among insurers may improve welfare.

Suggested Citation

  • Biais, Bruno & Christian Gollier, 1994. "Adverse selection in an insurance pool," Working Papers 001, Risk and Insurance Archive.
    • Handle: RePEc:wop:riskar:001
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