Welfare-Improving Ambiguity in Insurance Markets with Asymmetric Information

13 Pages Posted: 31 Jul 2012 Last revised: 26 Dec 2019

See all articles by Kostas Koufopoulos

Kostas Koufopoulos

University of Warwick - Finance Group

Roman Kozhan

University of Warwick - Warwick Business School

Date Written: June 2013

Abstract

We consider a model of competitive insurance markets involving both asymmetric information and ambiguity about the accident probability. We show that there can exist a full-insurance pooling equilibrium. We also present an example where an increase in ambiguity leads to a strict Pareto improvement. Higher ambiguity relaxes the high-risks’ incentive compatibility constraint and allows low risks to buy more insurance. Higher ambiguity also deteriorates the low risks’ expected utility from holding an uncertain prospect. If the former effect dominates, the expected utility of low risks increases and given that the high risks’ utility remains unaffected, the increase in ambiguity implies a strict Pareto improvement.

Keywords: ambiguity aversion, asymmetric information, value of ambiguous information

JEL Classification: D82, G22

Suggested Citation

Koufopoulos, Kostas and Kozhan, Roman, Welfare-Improving Ambiguity in Insurance Markets with Asymmetric Information (June 2013). WBS Finance Group Research Paper No. 190. Available at SSRN: https://ssrn.com/abstract=2120653 or http://dx.doi.org/10.2139/ssrn.2120653

Kostas Koufopoulos

University of Warwick - Finance Group ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

Roman Kozhan (Contact Author)

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

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