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Heterogeneity, demand for insurance and adverse selection

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  • Spinnewijn, Johannes

Abstract

Recent evidence underlines the importance of demand frictions distorting insurance choices. Heterogeneous frictions cause the willingness to pay for insurance to be biased upward (relative to value) for those purchasing insurance, but downward for those who remain uninsured. The paper integrates this finding with standard methods for evaluating welfare in insurance markets and demonstrates how welfare conclusions regarding adversely selected markets are affected. The demand frictions framework also makes qualitatively different predictions about the desir- ability of policies like insurance subsidies and mandates, commonly used to tackle adverse selection.

Suggested Citation

  • Spinnewijn, Johannes, 2017. "Heterogeneity, demand for insurance and adverse selection," LSE Research Online Documents on Economics 66511, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:66511
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    File URL: https://researchonline.lse.ac.uk/id/eprint/66511/
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    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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