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Adverse selection, competition, and linear self-insurance

Author

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  • Dan Anderberg

    (Department of Economics, Lund University, Sweden)

Abstract

A two-class insurance model is analysed. In addition to a competitive insurance market, the households can use a simple linear self-insurance technology. Using the recently proposed Coalition Proof Equilibrium with Private Information due to Kahn and Mookherjee (1995) the insurance market equilibrium is found to be either separating or pooling. There may be profits in equilibrium. The self-insurance option can, but does not necessarily, promote more efficient allocation of consumption; self-insurance may be dysfunctional, lowering welfare. The model is applied to a competitive private pension market where the households in addition can save in a bequeathable asset.

Suggested Citation

  • Dan Anderberg, 1999. "Adverse selection, competition, and linear self-insurance," Finnish Economic Papers, Finnish Economic Association, vol. 12(1), pages 3-15, Spring.
  • Handle: RePEc:fep:journl:v:12:y:1999:i:1:p:3-15
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    File URL: http://www.taloustieteellinenyhdistys.fi/images/stories/fep/f1999_1a.pdf
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    References listed on IDEAS

    as
    1. Eichenbaum, Martin S & Peled, Dan, 1987. "Capital Accumulation and Annuities in an Adverse Selection Economy," Journal of Political Economy, University of Chicago Press, vol. 95(2), pages 334-354, April.
    2. Kahn Charles M. & Mookherjee Dilip, 1995. "Coalition Proof Equilibrium in an Adverse Selection Insurance Economy," Journal of Economic Theory, Elsevier, vol. 66(1), pages 113-138, June.
    3. Arnott, Richard & Stiglitz, Joseph E, 1991. "Moral Hazard and Nonmarket Institutions: Dysfunctional Crowding Out or Peer Monitoring?," American Economic Review, American Economic Association, vol. 81(1), pages 179-190, March.
    4. Ehrlich, Isaac & Becker, Gary S, 1972. "Market Insurance, Self-Insurance, and Self-Protection," Journal of Political Economy, University of Chicago Press, vol. 80(4), pages 623-648, July-Aug..
    5. Eckstein, Zvi & Eichenbaum, Martin & Peled, Dan, 1985. "Uncertain lifetimes and the welfare enhancing properties of annuity markets and social security," Journal of Public Economics, Elsevier, vol. 26(3), pages 303-326, April.
    6. Picard, Pierre, 1987. "On the design of incentive schemes under moral hazard and adverse selection," Journal of Public Economics, Elsevier, vol. 33(3), pages 305-331, August.
    7. Hellwig, Martin, 1987. "Some recent developments in the theory of competition in markets with adverse selection ," European Economic Review, Elsevier, vol. 31(1-2), pages 319-325.
    8. Engers, Maxim & Fernandez, Luis F, 1987. "Market Equilibrium with Hidden Knowledge and Self-selection," Econometrica, Econometric Society, vol. 55(2), pages 425-439, March.
    9. Wilson, Charles, 1977. "A model of insurance markets with incomplete information," Journal of Economic Theory, Elsevier, vol. 16(2), pages 167-207, December.
    Full references (including those not matched with items on IDEAS)

    More about this item

    JEL classification:

    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D89 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Other

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