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The Market for Lemons: Costly Insurance, Coverage Denials, and Pooling

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  • hector chade

    (arizona state university)

Abstract

We introduce costly insurance provision into a standard monopoly insurance model with adverse selection, where the consumer has private information about the probability of suffering a loss. We obtain two main results that do not arise in the standard model. First, we derive a general comparative statics result about coverage denial only to those likely to be the worst risks. Second, we show that the optimal menu the insurer offers can entail complete pooling of all types. We also show that these results do not hold in a costly provision version of the competitive model of Rothschild-Stiglitz. Finally, we discuss the implications of these results for empirical work on insurance with adverse selection.

Suggested Citation

  • hector chade, 2016. "The Market for Lemons: Costly Insurance, Coverage Denials, and Pooling," 2016 Meeting Papers 1097, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:1097
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    References listed on IDEAS

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    1. R. Anton Braun & Karen A. Kopecky, 2024. "Reforming the US Long-Term Care Insurance Market," Working Papers 24-17, Federal Reserve Bank of Cleveland.

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