The Value of Ignorance: Behavioral Preferences for Genetic Information and Insurance Market Equilibria

We study how behavioral heterogeneity in preferences for information acquisition affects equilibrium outcomes in health insurance markets. Individuals differ in the psychological utility they derive from learning information about their health risks, generating heterogeneous demand for genetic testing even when tests are inexpensive. The value of becoming informed depends on the insurance contracts available, while these contracts themselves depend on the fraction of individuals who acquire information. Information acquisition and insurance-market outcomes are therefore jointly determined. We show that these behavioral differences shape both the extent of adverse selection and whether the equilibrium is pooling or separating. Within a given contractual regime, stronger attraction to chance reduces information acquisition and mitigates adverse selection; in turn, it expands the range of testing costs for which the Wilson-type criterion selects pooling. Moreover, cheaper access to genetic information need not be associated with greater equilibrium information acquisition. At the testing-cost threshold at which the equilibrium switches from pooling to separation, the separating equilibrium prevailing at lower testing costs can exhibit a lower testing rate than the pooling equilibrium prevailing at slightly higher costs. Thus, the effect of technological progress on information acquisition depends on its endogenous impact on insurance contracts and equilibrium selection.