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Consumer Risk Perceptions and Information in Insurance Markets with Adverse Selection

Author

Listed:
  • James A. Ligon

    (Department of Economics, Finance and Legal Studies, University of Alabama, 35487 Tuscaloosa AL)

  • Paul D. Thistle

    (Department of Economics, Western Michigan University, 49008 Kalamazoo MI)

Abstract

Standard models of adverse selection in insurance markets assume policyholders know their loss distributions. This study examines the nature of equilibrium and the equilibrium value of information in competitive insurance markets where consumers lack complete information regarding their loss probabilities. We show that additional private information is privately and socially valuable. When the equilibrium policies separate types, policyholders can deduce the underlying probabilities from the contracts, so it is information on risk type, rather than loss probability per se, that is valuable. We show that the equilibrium is “as if” policyholders were endowed with complete knowledge if, and only if, information is noiseless and costless. If information is noisy, the equilibrium depends on policyholders' prior beliefs and the amount of noise in the information they acquire. The Geneva Papers on Risk and Insurance Theory (1996) 21, 191–210. doi:10.1007/BF00941938

Suggested Citation

  • James A. Ligon & Paul D. Thistle, 1996. "Consumer Risk Perceptions and Information in Insurance Markets with Adverse Selection," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 21(2), pages 191-210, December.
  • Handle: RePEc:pal:genrir:v:21:y:1996:i:2:p:191-210
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    Cited by:

    1. Mattias K. Polborn & Mike Hoy & Asha Sadanand, 1999. "Information and Dynamic Adjustment in Life Insurance Markets," UWO Department of Economics Working Papers 9911, University of Western Ontario, Department of Economics.
    2. Michael Hoy & Peter Lambert, 2000. "Genetic Screening and Price Discrimination in Insurance Markets," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 25(2), pages 103-130, December.

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