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Signaling theory revisited: a very short insurance case

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  • Volker Bieta

Abstract

In order to reduce informational asymmetry a signaling contract seems to be an efficient solution. Standard theory argues that insurance contracts typically produce separating equilibria. Mostly, this property is based on the assumption of two states of the world only. If however, there is a world with a continuum of states the solution is different. We prove that there is no longer a separating equilibrium. As a result, insurance markets are characterized by pooling equilibria or self-insurance structures. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Volker Bieta, 2015. "Signaling theory revisited: a very short insurance case," Annals of Operations Research, Springer, vol. 235(1), pages 75-84, December.
    • Handle: RePEc:spr:annopr:v:235:y:2015:i:1:p:75-84:10.1007/s10479-015-1958-6
    DOI: 10.1007/s10479-015-1958-6
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    References listed on IDEAS

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    1. Michel Grabisch & Peter Sudhölter, 2012. "The bounded core for games with precedence constraints," Annals of Operations Research, Springer, vol. 201(1), pages 251-264, December.
    2. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, Decembrie.
    3. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
    4. Wilson, Charles, 1977. "A model of insurance markets with incomplete information," Journal of Economic Theory, Elsevier, vol. 16(2), pages 167-207, December.
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    More about this item

    Keywords

    Contracting; Second order stochastic dominance; Game theory; C7; D8; G0; G1; G2;
    All these keywords.

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G0 - Financial Economics - - General
    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services

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