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Optimal risk‐sharing under adverse selection and imperfect risk perception

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  • Arnold Chassagnon
  • Bertrand Villeneuve

Abstract

. The present paper thoroughly explores second‐best efficient allocations in an insurance economy with adverse selection. We start with a natural extension of the classical model, assuming less than perfect risk perception. We characterize the constraints on efficient redistribution, and we summarize the incidence of incentives on the economy with the notions of weak and strong adverse selection. Finally, we show in what sense improving risk perception enhances welfare. Partage optmal du risque avec antisélection et perception imparfaite du risque. Cet article examine en détail les allocations d’assurance de second‐rang dans une économie soumise à l’antisélection. Partant d’une extension naturelle du modèle classique, nous supposons une perception imparfaite du risque. Nous caractérisons les contraintes qui s’exercent sur la redistribution des richesses et nous résumons les différentes possibilités grâce aux notions d’antisélection faible et d’antisélection forte. Pour finir, nous montrons en quel sens l’amélioration de la perception du risque améliore le bien‐être.

Suggested Citation

  • Arnold Chassagnon & Bertrand Villeneuve, 2005. "Optimal risk‐sharing under adverse selection and imperfect risk perception," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 38(3), pages 955-978, August.
  • Handle: RePEc:wly:canjec:v:38:y:2005:i:3:p:955-978
    DOI: 10.1111/j.0008-4085.2005.00311.x
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    1. Meglena Jeleva & Bertrand Villeneuve, 2004. "Insurance contracts with imprecise probabilities and adverse selection," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 23(4), pages 777-794, May.
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    5. Dionne, Georges & Fombaron, Nathalie, 1996. "Non-convexities and the efficiency of equilibria in insurance markets with asymmetric information," Economics Letters, Elsevier, vol. 52(1), pages 31-40, July.
    6. Michael Landsberger & Isaac Meilijson, 1999. "A general model of insurance under adverse selection," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 14(2), pages 331-352.
    7. de Meza, David & Webb, David C, 2001. "Advantageous Selection in Insurance Markets," RAND Journal of Economics, The RAND Corporation, vol. 32(2), pages 249-262, Summer.
    8. Guesnerie, Roger & Laffont, Jean-Jacques, 1984. "A complete solution to a class of principal-agent problems with an application to the control of a self-managed firm," Journal of Public Economics, Elsevier, vol. 25(3), pages 329-369, December.
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    10. repec:dau:papers:123456789/5358 is not listed on IDEAS
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    Cited by:

    1. Eberhard Feess & Cathrin Jordan & Ilan Noy, 2022. "Insurance for Catastrophes - Indemnity vs. Parametric Insurance with Imperfect Information," CESifo Working Paper Series 9631, CESifo.
    2. DE FEO, Giuseppe & HINDRIKS, Jean, 2005. "Efficiency of competition in insurance markets with adverse selection," LIDAM Discussion Papers CORE 2005054, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    3. Amy Finkelstein & Kathleen McGarry, 2006. "Multiple Dimensions of Private Information: Evidence from the Long-Term Care Insurance Market," American Economic Review, American Economic Association, vol. 96(4), pages 938-958, September.
    4. S. Hun Seog, 2009. "Insurance Markets With Differential Information," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(2), pages 279-294, June.
    5. Plisson, Manuel, 2009. "Assurabilité et développement de l'assurance dépendance," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/5064 edited by Lorenzi, Jean-Hervé.

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