Insurance as a lemons market: Coverage denials and pooling

• 成果类型: Article
• 署名作者: Chade, Hector; Schlee, Edward E.
• 署名单位: Arizona State University; Arizona State University-Tempe
• 刊物名称: JOURNAL OF ECONOMIC THEORY
• ISSN/ISSBN: 0022-0531
• DOI: 10.1016/j.jet.2020.105085
• 发表日期: 2020
• 关键词: Adverse selection; insurance; Loading; Coverage denials; pooling

摘要

The standard monopoly insurance model with adverse selection implies that there are always gains to trade, that only the best (unobservable) risks can go uninsured, and that a profit-maximizing menu cannot pool all types. We show that insurance-provision costs can explain both coverage denials only to those likely to be the worst risks and complete pooling. Specifically, we prove a general comparative statics theorem formalizing coverage denials only to those deemed to be the worst risks; and two theorems showing that the insurer offers a single contract (complete pooling), with either zero or positive coverage. We point out some implications of these results for empirical work on insurance. Our results expand upon a point made by Hendren (2013), that the main effect of adverse selection on insurance might not be misallocation in active markets - the traditional emphasis after Rothschild and Stiglitz (1976) - but simply in shutting down markets, as in Akerlof (1970) classic lemons model. (C) 2020 Elsevier Inc. All rights reserved.