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Information Design in Insurance Markets: Selling Peaches in a Market for Lemons

Author

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  • Daniel Garcia
  • Roee Teper
  • Matan Tsur

Abstract

This paper characterizes the optimal information structure in competitive insurance markets with adverse selection. A regulator assigns ratings to individuals according to their risk characteristics, insurers offer fixed insurance contracts to each rating group, and the market clears as in Akerlof (1970). The optimal rating system minimizes ex-ante risk subject to participation constraints. We prove that in any such market there exists a unique optimal system under which all individuals trade and the ratings match low risk types with high risk types negative assortatively. A simple algorithm yields the optimal system. We examine implications for government regulations of insurance markets.

Suggested Citation

  • Daniel Garcia & Roee Teper & Matan Tsur, 2018. "Information Design in Insurance Markets: Selling Peaches in a Market for Lemons," CESifo Working Paper Series 6853, CESifo.
    • Handle: RePEc:ces:ceswps:_6853
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    References listed on IDEAS

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    4. Levin, Jonathan, 2001. "Information and the Market for Lemons," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 657-666, Winter.
    5. Michael Geruso & Timothy J. Layton, 2017. "Selection in Health Insurance Markets and Its Policy Remedies," Journal of Economic Perspectives, American Economic Association, vol. 31(4), pages 23-50, Fall.
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    7. Hirshleifer, Jack, 1971. "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review, American Economic Association, vol. 61(4), pages 561-574, September.
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    11. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
    12. Edward E. Schlee, 2001. "The Value of Information in Efficient Risk-Sharing Arrangements," American Economic Review, American Economic Association, vol. 91(3), pages 509-524, June.
    13. Ben Handel & Igal Hendel & Michael D. Whinston, 2015. "Equilibria in Health Exchanges: Adverse Selection versus Reclassification Risk," Econometrica, Econometric Society, vol. 83(4), pages 1261-1313, July.
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    Cited by:

    1. Navin Kartik & Weijie Zhong, 2023. "Lemonade from Lemons: Information Design and Adverse Selection," Papers 2305.02994, arXiv.org.
    2. Farzaneh Farhadi & Demosthenis Teneketzis, 2022. "Dynamic Information Design: A Simple Problem on Optimal Sequential Information Disclosure," Dynamic Games and Applications, Springer, vol. 12(2), pages 443-484, June.

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    More about this item

    Keywords

    insurance markets; adverse selection; information design;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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