Adverse selection, competition, and linear self-insurance
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.
Volume (Year): 12 (1999)
Issue (Month): 1 (Spring)
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