Facilitating Consumer Learning in Insurance Markets:  What Are the Welfare Effects?. (25th March 2018)

• Record Type: Journal Article
• Authors: Lagerlöf, Johan N. M.; Schottmüller, Christoph
• Is Part Of: Scandinavian journal of economics. Volume 120:Number 2(2018)
• Page Start: 465
• Page End: 502
• Publication Date: 2018-03-25
• Subjects: Adverse selection -- consumer policy -- genetic testing -- information acquisition -- insurance; Economics -- Periodicals; 330.05
• DOI: 10.1111/sjoe.12231
• Languages: English
• ISSNs: 0347-0520

Abstract

Abstract: We model a monopoly insurance market in which consumers can learn their accident risks at a cost c . We then examine the welfare effects of a policy that reduces c . If c is sufficiently small ( c < c * ), the optimal contract is such that the consumer gathers information. For c < c *, both the insurer and the consumer benefit from a policy that reduces c further. For c > c *, marginally reducing c hurts the insurer and weakly benefits the consumer. Finally, a reduction in c that is successful, meaning that the consumer gathers information after the reduction but not before it, can hurt both parties.