Working Paper: CEPR ID: DP9753
Authors: Johan N. M. Lagerlöf; Christoph Schottmüller
Abstract: What are the welfare effects of a policy that facilitates for insurance customers to privately and covertly learn about their accident risks? We endogenize the information structure in Stiglitz's classic monopoly insurance model. We first show that his results are robust: For a small information acquisition cost c, the consumer gathers information and the optimal contracts are close to the ones in the Stiglitz model. If c is so low that the consumer already gathers information (cc*, marginally reducing c hurts the insurer and weakly benefits the consumer. Paradoxically, a reduction in c that is ?successful,? meaning that the consumer gathers information after the reduction but not before it, can hurt both parties. The reasons for this are that, after the reduction, (i) the cost is actually incurred and (ii) the contracts can be more distorted.
Keywords: Adverse Selection; Asymmetric Information; Information Acquisition; Insurance; Screening
JEL Codes: D82; I13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| cost of information acquisition (c) (D83) | welfare outcomes for consumers and insurers (G52) |
| c < c0 (C69) | consumers gather information about their accident risks (G52) |
| consumers gather information about their accident risks (G52) | improved welfare outcomes for both consumers and insurers (G52) |
| c0 < c < c00 (C24) | reduction in c can harm both the insurer and the consumer (G52) |
| reduction in c (C24) | consumers begin to gather information (D16) |
| consumers begin to gather information (D16) | lower expected utility for consumers (D11) |
| reduction in c (C24) | potential distortion of insurance contracts (G52) |