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Monopoly Insurance with Endogenous Information

  • Johan N.M. Lagerlöf

    (Department of Economics, Copenhagen University)

  • Christoph Schotmüller

    (Department of Economics, Tilburg University)

We study a monopoly insurance model with endogenous information acquisition. Through a continuous effort choice, consumers can determine the precision of a privately observed signal that is informative about their accident risk. The equilibrium effort is, depending on parameter values, either zero (implying symmetric information) or positive (implying privately informed consumers). Regardless of the nature of the equilibrium, all offered contracts, also at the top, involve underinsurance. The reason is that underinsurance at the top discourages information gathering. We identify a sorting effect that explains why the insurer wants to discourage information acquisition. Moreover, a public policy that decreases the information gathering costs can hurt both parties. Lower information gathering costs can harm consumers because the insurer adjusts the optimal contract menu in an unfavorable manner.

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Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 13-15.

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Length: 38 pages
Date of creation: 26 Nov 2013
Date of revision:
Handle: RePEc:kud:kuiedp:1315
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  1. Khalil, F & Rochet, J-C, 1997. "Contracts and Productive Information Gathering," Working Papers 97-16, University of Washington, Department of Economics.
  2. Johan N. M. Lagerlöf & Christoph Schottmüller, 2013. "Facilitating Consumer Learning in Insurance Markets - What Are the Welfare Effects?," Discussion Papers 13-12, University of Copenhagen. Department of Economics.
  3. Leemore S. Dafny, 2010. "Are Health Insurance Markets Competitive?," American Economic Review, American Economic Association, vol. 100(4), pages 1399-1431, September.
  4. Bardey, David & De Donder, Philippe, 2012. "Genetic testing with primary prevention and moral hazard," CEPR Discussion Papers 8977, C.E.P.R. Discussion Papers.
  5. Cremer, J. & Khalil, F., 1991. "Gathering Information Before Signing a Contract," Working Papers 91-16, University of Washington, Department of Economics.
  6. Xianwen Shi, 2007. "Optimal Auctions with Information Acquisition," Working Papers tecipa-302, University of Toronto, Department of Economics.
  7. Nicola Persico, 2000. "Information Acquisition in Auctions," Econometrica, Econometric Society, vol. 68(1), pages 135-148, January.
  8. Doherty, Neil A. & Thistle, Paul D., 1996. "Adverse selection with endogenous information in insurance markets," Journal of Public Economics, Elsevier, vol. 63(1), pages 83-102, December.
  9. Dezso Szalay, 2006. "Contracts with Endogenous Information," The Warwick Economics Research Paper Series (TWERPS) 780, University of Warwick, Department of Economics.
  10. Stiglitz, Joseph E, 1977. "Monopoly, Non-linear Pricing and Imperfect Information: The Insurance Market," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 407-30, October.
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