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The Problem of Asymmetric Information: A Simulation of How Insurance Markets Can Be Inefficient
Author(s) -
Eckles David L.,
Halek Martin
Publication year - 2007
Publication title -
risk management and insurance review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.386
H-Index - 16
eISSN - 1540-6296
pISSN - 1098-1616
DOI - 10.1111/j.1540-6296.2007.00108.x
Subject(s) - adverse selection , purchasing , information asymmetry , actuarial science , selection (genetic algorithm) , group insurance , limit (mathematics) , auto insurance risk selection , business , key person insurance , insurance policy , economics , marketing , general insurance , microeconomics , computer science , income protection insurance , mathematical analysis , mathematics , artificial intelligence
The concept of adverse selection is discussed in virtually all academic insurance textbooks. However, undergraduate students have rarely had the experience of purchasing insurance which may limit their ability to fully comprehend the market inefficiencies created by asymmetric information. We provide a classroom simulation of an insurance market that highlights the concept of adverse selection and its impact on the insurance industry. Participants are asked to make insurance decisions in pursuit of their own interests under different market conditions. In the absence of perfect information, participants actively observe that a socially optimal outcome does not occur.