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Insurance Contracts with Adverse Selection When the Insurer Has Ambiguity about the Composition of the Consumers
Zheng ML(鄭明禮)1; Chong Wang1; Chaozheng Li2
2016-01
Source PublicationAnnals of Economics & Finance
Volume17Issue:1Pages:179-206
Abstract

In this paper, we consider the optimal contract in a monopolistic insurance market when the insurer has ambiguity about the composition of the consumers. When there are only two types of consumers, we find that high-risk consumers are fully insured, whereas low-risk consumers are only partially insured. For an ambiguity averse insurer, as ambiguity increases, the optimal menu of contracts moves toward the one that equalizes the profits earned by the insurer from the two types of consumers. The insurer may offer the same menu of contracts even if her prior belief changes. For an ambiguity seeking insurer, when the degree of ambiguity increases, the optimal menu moves away from the menu that equalizes the profits earned from the two types of consumers.

Keyword: Adverse Selection Monopoly Insurance Ambiguity Ε-contaminated Prior
Document TypeJournal article
CollectionFaculty of Social Sciences
DEPARTMENT OF ECONOMICS
Affiliation1.University of Macau
2.University of Kansas
First Author AffilicationUniversity of Macau
Recommended Citation
GB/T 7714
Zheng ML,Chong Wang,Chaozheng Li. Insurance Contracts with Adverse Selection When the Insurer Has Ambiguity about the Composition of the Consumers[J]. Annals of Economics & Finance, 2016, 17(1), 179-206.
APA Zheng ML., Chong Wang., & Chaozheng Li (2016). Insurance Contracts with Adverse Selection When the Insurer Has Ambiguity about the Composition of the Consumers. Annals of Economics & Finance, 17(1), 179-206.
MLA Zheng ML,et al."Insurance Contracts with Adverse Selection When the Insurer Has Ambiguity about the Composition of the Consumers".Annals of Economics & Finance 17.1(2016):179-206.
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