Premium
HIDDEN REGRET IN INSURANCE MARKETS
Author(s) -
Huang Rachel J.,
Muermann Alexander,
Tzeng Larry Y.
Publication year - 2016
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/jori.12096
Subject(s) - rothschild , adverse selection , regret , pooling , economics , microeconomics , contrast (vision) , information asymmetry , insurance policy , risk pool , actuarial science , econometrics , mathematics , key person insurance , computer science , statistics , archaeology , artificial intelligence , history
A bstract We examine insurance markets with two‐dimensional asymmetric information on risk type and on preferences related to regret. In contrast to Rothschild and Stiglitz ([Rothschild, M., 1976]), the equilibrium can be efficient; that is, it can coincide with the equilibrium under full information. Furthermore, we show that pooling, semipooling, and separating equilibria can exist. Specifically, there exist separating equilibria that predict a positive correlation between the level of insurance coverage and risk type, as in the standard economic models of adverse selection, but there also exist separating equilibria that predict a negative correlation between the level of insurance coverage and risk type. Since optimal choice of regretful customers depends on foregone alternatives, the equilibrium includes a contract that is offered but not purchased.