On the Role of Patience in an Insurance Market With Asymmetric Information

Abstract

We analyze a two-period competitive insurance market that is characterized by the simultaneous presence of moral hazard and adverse selection with regard to consumer time preferences. It is shown that there exists an equilibrium in which patient consumers use high effort and buy an insurance contract with high coverage, whereas impatient consumers use low effort and buy a contract with low coverage or even remain uninsured. This finding may help to explain why the opposite of adverse selection with regard to risk types can sometimes be observed empirically. Copyright (c) The Journal of Risk and Insurance, 2009.

The Asymmetric Information Problem in Taiwan's Cancer Insurance Market

“…Hence, the individual who purchases more coverage may also have a lower ex post risk probability. The literature has explained the motivation behind the individual's precautionary effort in relation to risk aversion (de Meza and Webb, 2001), risk perception (Koufopoulos, 2003;Huang, Liu and Tzeng, 2006), patience (Sonnenholzner and Wambach, 2006), and regret (Huang et al, 2008). 5 For example, in Chiappori and Salanie (2000), the young drivers' high coverage contracts choices are affected by their parents' good past records, and this could induce the problem of moral hazard.…”

Adverse Selection in Insurance Contracting

“…In the three above-mentioned models, the con…guration in which the high-risk contract breaks even while the low-risk contract earns a positive pro…t cannot be a two-stage Nash equilibrium; there always exists a pair of incentive-compatible and jointly pro…table contracts attractive to both risk types (an unpro…table contract with full coverage attracting only high-risks and a pro…table contract attracting low-risks). Similar reasoning applies to the model investigated by Sonnenholzner and Wambach (2009), combining moral hazard with adverse selection.…”

“…In a two-period model combining moral hazard and adverse selection, Sonnenholzner and Wambach (2009) propose another explanation of why the relationship between level of risk and insurance coverage can be of any sign. They stress the role of (unobservable) individual personal discount in explaining the decision to purchase insurance.…”

Research of two‐period insurance contract model with a low compensation period under adverse selection

“…Finally, it must be pointed out that this paper studies a pure adverse selection model of the insurance market, but in fact, information asymmetry will inevitably produce two problems: adverse selection and moral hazard. Many scholars around the world have studied contract design under the condition of moral hazard in the insurance market (Helpman & Laffont, ; Spence & Zeckhauser, ), multiperiod dynamic contract design under moral hazard conditions (Osano & Kobayashi, ; Rubinstein & Yaari, ), single‐period static contract design with both adverse selection and moral hazard (Dionne & Gagné, ), multiperiod dynamic contract design with both adverse selection and moral hazard (Sonnenholzner & Wambach, ). Therefore, future research can consider extending the model in this paper to a multiperiod situation in which moral hazard exists alone or both adverse selection and moral hazard exist simultaneously.…”