Abstract
This paper characterizes the optimal information structure in competitive insurance markets with adverse selection. We consider a regulator that assigns ratings to individuals according to their expected costs. Insurers observe these ratings and compete as in Akerlof (1970). The optimal rating system minimizes ex-ante risk subject to participation constraints. We prove that in any such market there exists a unique optimal system under which all individuals trade and the ratings match low-cost types with high-cost types negative assortatively. We provide a simple algorithm that yields the optimal system and examine implications for government regulations of insurance markets.
| Original language | English |
|---|---|
| Article number | 105160 |
| Number of pages | 18 |
| Journal | Journal of Economic Theory |
| Volume | 191 |
| Early online date | 18 Nov 2020 |
| DOIs | |
| Publication status | Published - 15 Jan 2021 |
Bibliographical note
Funding Information:We are thankful for the contributions of Roee Teper to this work. We would also like to thank the Editor, Alessandro Pavan, and three referees for their comments and suggestions. We also thank Anton Kolotilin, Alessandro Lizzeri, and Doron Ravid, for their feedback. Financial support from the Austrian Science Fund: P 30922 is gratefully acknowledged.
Publisher Copyright:
© 2020 The Author(s)
Structured keywords
- ECON CEPS Welfare
- ECON CEPS Health
Keywords
- Insurance Markets
- Adverse Selection
- Information Design
- Econ Microeconomic Theory