HIDDEN REGRET IN INSURANCE MARKETS. Issue 1 (18th September 2015)

• Record Type: Journal Article
• Authors: Huang, Rachel J.; Muermann, Alexander; Tzeng, Larry Y.
• Is Part Of: Journal of risk and insurance. Volume 83:Issue 1(2016)
• Page Start: 181
• Page End: 216
• Publication Date: 2015-09-18
• Subjects: Insurance -- United States -- Periodicals; 368.97305
• DOI: 10.1111/jori.12096
• Languages: English
• ISSNs: 0022-4367

Abstract

Abstract : We examine insurance markets with two‐dimensional asymmetric information on risk type and on preferences related to regret. In contrast to Rothschild and Stiglitz (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.