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Optimal risk‐sharing under adverse selection and imperfect risk perception
Author(s) -
Chassag Arnold,
Villeneuve Bertrand
Publication year - 2005
Publication title -
canadian journal of economics/revue canadienne d'économique
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.773
H-Index - 69
eISSN - 1540-5982
pISSN - 0008-4085
DOI - 10.1111/j.0008-4085.2005.00311.x
Subject(s) - adverse selection , imperfect , economics , incentive , redistribution (election) , perception , welfare , microeconomics , selection (genetic algorithm) , risk perception , extension (predicate logic) , actuarial science , computer science , psychology , artificial intelligence , market economy , linguistics , programming language , neuroscience , politics , political science , law , philosophy
. The present paper thoroughly explores second‐best efficient allocations in an insurance economy with adverse selection. We start with a natural extension of the classical model, assuming less than perfect risk perception. We characterize the constraints on efficient redistribution, and we summarize the incidence of incentives on the economy with the notions of weak and strong adverse selection. Finally, we show in what sense improving risk perception enhances welfare.