Advantageous Selection in Insurance Market
Paper number: 00/07
Paper date: November 23, 2000
Paper Category: Working Paper
David de Meza, David C. Webb
This paper reverses the standard conclusion that asymmetric information plus competition results in insucient insurance provision. Risk-tolerant individuals take few precautions and are disinclined to insure, but are drawn into a pooling equilibrium by the low premiums created by the presence of safer, more risk-averse types. Taxing insurance drives out the reckless clients, allowing a strict Pareto gain. This result depends on administrative costs in processing claims and issuing policies, as does the novel finding of a pure-strategy, partial-pooling, sub-game-perfect, Nash equilibrium in the insurance market.