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Overconfidence and asymmetric information: The case of insurance

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  • Sandroni, Alvaro
  • Squintani, Francesco

Abstract

This paper contributes to the recent behavioral economics literature by showing that whether or not overconfidence changes qualitative predictions in asymmetric information markets may depend on the market structure itself. We first show that overconfidence may overturn fundamental relations between observable variables in perfect-competition asymmetric information insurance markets. In monopolistic insurance markets, in constrast, we find that overconfidence may be observationally equivalent to variations in the risk composition of the economy. Our analysis provides a number of novel testable implications on (i) price heterogeneity within and across risk classes, (ii) the relationship between ex-post risk and insurance coverage, (iii) the fact that a significant fraction of agents chooses to be uninsured, and (iv) the relationship between underinsurance and age.

Suggested Citation

  • Sandroni, Alvaro & Squintani, Francesco, 2013. "Overconfidence and asymmetric information: The case of insurance," Journal of Economic Behavior & Organization, Elsevier, vol. 93(C), pages 149-165.
  • Handle: RePEc:eee:jeborg:v:93:y:2013:i:c:p:149-165
    DOI: 10.1016/j.jebo.2012.10.015
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Michael D. Grubb, 2015. "Overconfident Consumers in the Marketplace," Journal of Economic Perspectives, American Economic Association, vol. 29(4), pages 9-36, Fall.
    2. Schumacher, Heiner, 2016. "Insurance, self-control, and contract flexibility," European Economic Review, Elsevier, vol. 83(C), pages 220-232.
    3. Michael Grubb, 2015. "Behavioral Consumers in Industrial Organization: An Overview," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 47(3), pages 247-258, November.
    4. Michael D. Grubb, 2015. "Behavioral Consumers in Industrial Organization," Boston College Working Papers in Economics 879, Boston College Department of Economics.
    5. Kremslehner, Daniela & Muermann, Alexander, 2016. "Asymmetric information in automobile insurance: Evidence from driving behavior," CFS Working Paper Series 543, Center for Financial Studies (CFS).
    6. Kirchgässner, Gebhard, 2014. "On the Process of Scientific Policy Advice - With Special Reference to Economic Policy," Economics Working Paper Series 1438, University of St. Gallen, School of Economics and Political Science.
    7. Proeger, Till & Meub, Lukas, 2014. "Overconfidence as a social bias: Experimental evidence," Economics Letters, Elsevier, vol. 122(2), pages 203-207.
    8. Andrzej Baniak & Peter Grajzl, 2014. "Controlling Product Risks when Consumers are Heterogeneously Overconfident: Producer Liability vs. Minimum Quality Standard Regulation," CESifo Working Paper Series 5003, CESifo Group Munich.

    More about this item

    Keywords

    Insurance; Overconfidence; Asymmetric Information;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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