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Multidimensional private information, market structure, and insurance markets
Author(s) -
Fang Hanming,
Wu Zenan
Publication year - 2018
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/1756-2171.12251
Subject(s) - adverse selection , realization (probability) , competition (biology) , private information retrieval , preference , monopoly , property (philosophy) , selection (genetic algorithm) , microeconomics , negative correlation , business , correlation , positive correlation , actuarial science , information asymmetry , economics , computer science , mathematics , statistics , computer security , medicine , ecology , philosophy , geometry , epistemology , artificial intelligence , biology
We investigate whether selection based on multidimensional private information in risks and risk preferences can, under different market structures, result in a negative correlation between insurance coverage and ex post realization of risk. We show that, under perfect competition, selection based on multidimensional private information does not result in the negative correlation property, unless there is a sufficiently high loading factor. However, it is possible to generate the negative correlation property under monopoly when risk and risk preference types are sufficiently negative dependent. We also clarify the connections between important concepts such as adverse/advantageous selection and positive/negative correlation property.