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Insurance Contracts with Adverse Selection When the Insurer Has Ambiguity about the Composition of the Consumers

Author

Listed:
  • Mingli Zheng

    () (Department of Economics, University of Macau)

  • Chong Wang

    (Department of Economics, University of Macau)

  • Chaozheng Li

    (Department of Economics, University of Kansas)

Abstract

In this paper, we consider the optimal contract in a monopolistic insurance market when the insurer has ambiguity about the composition of the con-sumers. When there are only two types of consumers, we find that high-risk consumers are fully insured, whereas low-risk consumers are only partially in-sured. For an ambiguity averse insurer, as ambiguity increases, the optimal menu of contracts moves toward the one that equalizes the profits earned by the insurer from the two types of consumers. The insurer may offer the same menu of contracts even if her prior belief changes. For an ambiguity seeking insurer, when the degree of ambiguity increases, the optimal menu moves away from the menu that equalizes the profits earned from the two types of consumers.

Suggested Citation

  • Mingli Zheng & Chong Wang & Chaozheng Li, 2016. "Insurance Contracts with Adverse Selection When the Insurer Has Ambiguity about the Composition of the Consumers," Annals of Economics and Finance, Society for AEF, vol. 17(1), pages 179-206, May.
  • Handle: RePEc:cuf:journl:y:2016:v:17:i:1:zheng
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Adverse selection; Monopoly; Insurance; Ambiguity; ε-contaminated prior;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly

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