Asymmetric Information, Heterogeneity in Risk Perceptions and Insurance: An Explanation to a Puzzle

27 Pages Posted: 18 Nov 2008

See all articles by Kostas Koufopoulos

Kostas Koufopoulos

University of Warwick - Finance Group

Date Written: November 14, 2008

Abstract

Competitive models of asymmetric information predict a positive relationship between coverage and risk. In contrast, most recent empirical studies find either negative or zero correlation. This paper, by introducing heterogeneity in risk perceptions into an asymmetric information competitive model, provides an explanation to this puzzle. If optimism discourages precautionary effort, there exist separating equilibria exhibiting the observed empirical patterns. It is also shown that zero correlation is consistent with information barriers to trade in insurance markets. The predictions of our model allow us to empirically distinguish it from standard asymmetric information models.

Keywords: Asymmetric Information, Insurance, Risk Perceptions

JEL Classification: D82, G22

Suggested Citation

Koufopoulos, Kostas, Asymmetric Information, Heterogeneity in Risk Perceptions and Insurance: An Explanation to a Puzzle (November 14, 2008). Available at SSRN: https://ssrn.com/abstract=1301522 or http://dx.doi.org/10.2139/ssrn.1301522

Kostas Koufopoulos (Contact Author)

University of Warwick - Finance Group ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

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