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Advantageous Selection in Insurance Market

Author

Listed:
  • De Meza, D.
  • Webb, D.C.

Abstract

This paper reverses the standard conclusion that asymmetric information plus competition results in insufficient insurance provision. Risk-tolerant individuals take few precautions and are disinclined to insure, but are drawn into a pooling equilibrium by the low premiums created by the presence of safer, more risk-averse types. Taxing insurance drives out the reckless clients, allowing a strict Pareto gain. This result depends on administrative costs in processing claims and issuing policies, as does the novel finding of a pure-strategy, partial-pooling, sub-game-perfect, Nash equilibrium in the insurance market.

Suggested Citation

  • De Meza, D. & Webb, D.C., 2000. "Advantageous Selection in Insurance Market," Discussion Papers 0007, Exeter University, Department of Economics.
  • Handle: RePEc:exe:wpaper:0007
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    References listed on IDEAS

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    More about this item

    Keywords

    INFORMATION ; COMPETITION ; INSURANCE ; RISK;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E53 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Deposit Insurance

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