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Adverse Selection and Insurance Contracting: A Rank-Dependent Utility Analysis

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  • Ryan Matthew Joseph

    (University of Auckland)

  • Vaithianathan Rhema

    (University of Auckland)

Abstract

Stiglitz (1977) established three well-known features of monopoly insurance markets subject to adverse selection: (i) at least one market segment is served, despite the informational asymmetry; (ii) there is always some screening of risk classes; and (iii) efficiency is sacrificed to achieve screening. We modify Stiglitz's model, replacing his expected utility assumption on consumer behavior with a version of Quiggin's (1982) rank-dependent utility model that has received strong experimental support. We show that none of the conclusions (i)-(iii) is robust to this revision. In particular, asymmetric information need not lead to any loss in efficiency.

Suggested Citation

  • Ryan Matthew Joseph & Vaithianathan Rhema, 2003. "Adverse Selection and Insurance Contracting: A Rank-Dependent Utility Analysis," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 3(1), pages 1-20, August.
    • Handle: RePEc:bpj:bejtec:v:contributions.3:y:2003:i:1:n:4
    DOI: 10.2202/1534-5971.1074
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    Cited by:

    1. Johanna Vásquez Velásquez & Karoll Gómez Portilla, 2004. "Selección adversa en el régimen contributivo de salud: el caso de la EPS de Susalud," Borradores del CIE 3489, Universidad de Antioquia, CIE.
    2. Cheung, Ka Chun & Phillip Yam, Sheung Chi & Yuen, Fei Lung & Zhang, Yiying, 2020. "Concave distortion risk minimizing reinsurance design under adverse selection," Insurance: Mathematics and Economics, Elsevier, vol. 91(C), pages 155-165.

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