An Experimental Investigation of Risk Sharing and Adverse Selection

23 Pages Posted: 24 Apr 2013

See all articles by Franziska Tausch

Franziska Tausch

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods

Johannes (Jan) J. M. Potters

Tilburg University - CentER

Arno Riedl

Maastricht University; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 2 versions of this paper

Date Written: April 23, 2013

Abstract

Does adverse selection hamper the effectiveness of voluntary risk sharing? How do differences in risk profiles affect adverse selection? We experimentally investigate individuals’ willingness to share risks with others. Across treatments we vary how risk profiles differ between individuals. We find strong evidence for adverse selection if individuals risk profiles can be ranked according to first-order stochastic dominance and only little evidence for adverse selection if risk profiles can only be ranked on the basis of second-order stochastic dominance. We observe the same pattern also for anticipated adverse selection. These results suggest that the degree to which adverse selection erodes voluntary risk sharing arrangements crucially depends on the form of risk heterogeneity.

Keywords: adverse selection, risk sharing, experiments, risk heterogeneity

JEL Classification: D810, C910

Suggested Citation

Tausch, Franziska and Potters, Johannes (Jan) J. M. and Riedl, Arno M., An Experimental Investigation of Risk Sharing and Adverse Selection (April 23, 2013). CESifo Working Paper Series No. 4192. Available at SSRN: https://ssrn.com/abstract=2255375

Franziska Tausch

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany

Johannes (Jan) J. M. Potters

Tilburg University - CentER ( email )

Department of Economics
P.O. Box 90153
5000 LE Tilburg
Netherlands
+31 13 466 8204 (Phone)
+31 13 466 3042 (Fax)

Arno M. Riedl (Contact Author)

Maastricht University ( email )

Department of Economics (AE1)
P.O. Box 616
Maastricht, 6200 MD
Netherlands

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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