Hidden regret in insurance markets: adverse and advantageous selection

  • We examine insurance markets with two types of customers: those who regret suboptimal decisions and those who don.t. In this setting, we characterize the equilibria under hidden information about the type of customers and hidden action. We show that both pooling and separating equilibria can exist. Furthermore, there exist separating equilibria that predict a positive correlation between the amount 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 amount of insurance coverage and risk type, i.e. advantageous selection. Since optimal choice of regretful customers depends on foregone alternatives, any equilibrium includes a contract which is o¤ered but not purchased.

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Author:Rachel J. Huang, Alexander Muermann, Larry Y. Tzeng
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2008,38
Series (Serial Number):CFS working paper series (2008, 38)
Document Type:Working Paper
Year of Completion:2008
Year of first Publication:2008
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2008/12/02
Tag:asymmetric information; insurance; regret
GND Keyword:Versicherungsmarkt; Versicherungsnehmer; Entscheidung
Institutes:Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht