Hidden Regret in Insurance Markets

36 Pages Posted: 19 Feb 2016

See all articles by Rachel J. Huang

Rachel J. Huang

National Central University at Taiwan - Department of Finance; Graduate Institute of Finance, NTUST

Alexander Muermann

WU (Vienna University of Economics and Business); Vienna Graduate School of Finance (VGSF)

Larry Y. Tzeng

National Taiwan University - Department of Finance

Date Written: March 2016

Abstract

We examine insurance markets with two‐dimensional asymmetric information on risk type and on preferences related to regret. In contrast to Rothschild and Stiglitz ([Rothschild, M., 1976]), the equilibrium can be efficient; that is, it can coincide with the equilibrium under full information. Furthermore, we show that pooling, semipooling, and separating equilibria can exist. Specifically, there exist separating equilibria that predict a positive correlation between the level of insurance coverage and risk type, as in the standard economic models of adverse selection, but there also exist separating equilibria that predict a negative correlation between the level of insurance coverage and risk type. Since optimal choice of regretful customers depends on foregone alternatives, the equilibrium includes a contract that is offered but not purchased.

Suggested Citation

Huang, Rachel J. and Muermann, Alexander and Tzeng, Larry, Hidden Regret in Insurance Markets (March 2016). Journal of Risk and Insurance, Vol. 83, Issue 1, pp. 181-216, 2016. Available at SSRN: https://ssrn.com/abstract=2734470 or http://dx.doi.org/10.1111/jori.12096

Rachel J. Huang (Contact Author)

National Central University at Taiwan - Department of Finance ( email )

No. 300, Jhongda Rd, Jhogli City, Taoyuan, Taiwan,
Jhongli, TY 32001
Taiwan

Graduate Institute of Finance, NTUST ( email )

#43,Sec.4
Keelung Rd
Taipei, Taipei 106
Taiwan

Alexander Muermann

WU (Vienna University of Economics and Business) ( email )

Welthandelsplatz 1
A - 1020 Wien
Austria
+43 1 31336 4948 (Phone)
+43 1 31336 90 4948 (Fax)

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
A - 1020 Wien
Austria

Larry Tzeng

National Taiwan University - Department of Finance ( email )

1 Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

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