Working Paper: CEPR ID: DP16310
Authors: Vitor Farinha Luz; Piero Gottardi; Humberto Moreira
Abstract: This paper studies a competitive model of insurance markets in which consumers are privately informed about their risk and risk preferences. We provide a tractable characterization of equilibria, which depend non-trivially on consumers' type distribution, a desirable feature for policy analysis. The use of consumer characteristics for risk classification is modeled as the disclosure of a public informative signal. A novel monotonicity property of signals is shown to be necessary and sufficient for their release to be welfare improving for almost all consumer types. We also study the effect of changes to the risk distribution in the population as the result of demographic changes or policy interventions. When considering the monotone likelihood ratio ordering of distributions, an increase in the risk distribution leads to lower utility for almost all consumer types. In contrast, the effect is ambiguous when considering the first order stochastic dominance ordering.
Keywords: risk classification; insurance markets; risk distribution; multidimensional private information
JEL Codes: G22; D82; I13; I18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Disclosure of a public informative signal (L96) | Improvement in welfare for almost all consumer types (D11) |
| Increase in risk distribution (D39) | Lower utility for almost all consumer types (L97) |
| Increase in high-risk aversion consumers (D11) | Lower equilibrium prices and higher utility for almost all types (D11) |
| Changes in distribution of risk preferences (D11) | Influence on equilibrium prices and utility (D11) |