Optimal Insurance: Dual Utility, Random Losses, and Adverse Selection
American Economic Review
vol. 113,
no. 10, October 2023
(pp. 2581-2614)
Abstract
We study a generalization of the classical monopoly insurance problem under adverse selection (see Stiglitz 1977) where we allow for a random distribution of losses, possibly correlated with the agent's risk parameter that is private information. Our model explains patterns of observed customer behavior and predicts insurance contracts most often observed in practice: these consist of menus of several deductible-premium pairs or menus of insurance with coverage limits–premium pairs. A main departure from the classical insurance literature is obtained here by endowing the agents with risk-averse preferences that can be represented by a dual utility functional (Yaari 1987).Citation
Gershkov, Alex, Benny Moldovanu, Philipp Strack, and Mengxi Zhang. 2023. "Optimal Insurance: Dual Utility, Random Losses, and Adverse Selection." American Economic Review, 113 (10): 2581-2614. DOI: 10.1257/aer.20221247Additional Materials
JEL Classification
- D81 Criteria for Decision-Making under Risk and Uncertainty
- D82 Asymmetric and Private Information; Mechanism Design
- D86 Economics of Contract: Theory
- D91 Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
- G22 Insurance; Insurance Companies; Actuarial Studies