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Full insurance, asymmetric information and genetic testing

Author

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  • José Penalva

Abstract

This paper extends previous resuls on optimal insurance trading in the presence of a stock market that allows continuous asset trading and substantial personal heterogeneity, and applies those results in a context of asymmetric information with references to the role of genetic testing in insurance markets. We find a novel and surprising result under symmetric information: agents may optimally prefer to purchase full insurance despite the presence of unfairly priced insurance contracts, and other assets which are correlated with insurance. Asymmetric information has a Hirschleifer-type effect which can be solved by suspending insurance trading. Nevertheless, agents can attain their first best allocations, which suggests that the practice of restricting insurance not to be contingent on genetic tests can be efficient.

Suggested Citation

  • José Penalva, 2000. "Full insurance, asymmetric information and genetic testing," Economics Working Papers 461, Department of Economics and Business, Universitat Pompeu Fabra.
    • Handle: RePEc:upf:upfgen:461
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    Cited by:

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    2. José S. Penalva, 2015. "Implications of Dynamic Trading for Insurance Markets," Working Papers 83, Barcelona School of Economics.
    3. José Penalva, 2003. "Implications of dynamic trading for insurance markets," Economics Working Papers 720, Department of Economics and Business, Universitat Pompeu Fabra.
    4. José S. Penalva, 2003. "A Study of the Interaction of Insurance and Financial Markets: Efficiency and Full Insurance Coverage," Working Papers 286, Barcelona School of Economics.

    More about this item

    Keywords

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    JEL classification:

    • 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
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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