Recent evidence underlines the importance of demand frictions distorting insurance choices. Heterogeneous frictions cause the willingness to pay for insurance to be biased upward (relative to value) for those purchasing insurance, but downward for those who remain uninsured. The paper integrates this finding with standard methods for evaluating welfare in insurance markets and demonstrates how welfare conclusions regarding adversely selected markets are affected. The demand frictions framework also makes qualitatively different predictions about the desirability of policies, such as insurance subsidies and mandates, commonly used to tackle adverse selection.
"Heterogeneity, Demand for Insurance, and Adverse Selection."
American Economic Journal: Economic Policy,
Consumer Economics: Theory
Criteria for Decision-Making under Risk and Uncertainty
Asymmetric and Private Information; Mechanism Design
Insurance; Insurance Companies; Actuarial Studies
Financial Institutions and Services: Government Policy and Regulation