Information Design in Insurance Markets: Selling Peaches in a Market for Lemons

46 Pages Posted: 15 Mar 2018

See all articles by Daniel Garcia

Daniel Garcia

University of Vienna

Roee Teper

Tel Aviv University

Matan Tsur

University of Vienna

Multiple version iconThere are 2 versions of this paper

Date Written: January 30, 2018

Abstract

This paper characterizes the optimal information structure in competitive insurance markets with adverse selection. A regulator assigns ratings to individuals according to their risk characteristics, insurers offer fixed insurance contracts to each rating group, and the market clears 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 risk types with high risk types negative assortatively. A simple algorithm yields the optimal system. We examine implications for government regulations of insurance markets.

Keywords: insurance markets, adverse selection, information design

JEL Classification: D820

Suggested Citation

Garcia, Daniel and Teper, Roee and Tsur, Matan, Information Design in Insurance Markets: Selling Peaches in a Market for Lemons (January 30, 2018). CESifo Working Paper Series No. 6853, Available at SSRN: https://ssrn.com/abstract=3140361

Daniel Garcia (Contact Author)

University of Vienna ( email )

Bruenner Strasse 72
Vienna, Vienna 1090
Austria

Roee Teper

Tel Aviv University ( email )

Ramat Aviv
Tel-Aviv, 6997801
Israel

Matan Tsur

University of Vienna ( email )

Bruenner Strasse 72
Vienna, Vienna 1090
Austria

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