Full Insurance, Asymmetric Information and Genetic Testing

27 Pages Posted: 14 Jul 2001  

José Penalva

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Date Written: undated

Abstract

This paper extends previous results on optimal insurance trading in the presence of a stock market that allows continuous asset trading and substantial personal heterogeneity, and applies those results in a context of asymmetric information with references to the role of genetic testing in insurance markets. We find a novel and surprising result under symmetric information: agents may optimally prefer to purchase full insurance despite the presence of unfairly priced insurance contracts, and other assets which are correlated with insurance. Asymmetric information has a Hirschleifer-type effect which can be solved by suspending insurance trading. Nevertheless, agents can attain their first best allocations, which suggests that the practice of restricting insurance not to be contingent on genetic tests can be efficient.

Suggested Citation

Penalva, José, Full Insurance, Asymmetric Information and Genetic Testing (undated). EFA 2001 Barcelona Meetings. Available at SSRN: https://ssrn.com/abstract=276674 or http://dx.doi.org/10.2139/ssrn.276674

José S Penalva Zuasti (Contact Author)

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
(34-93) 542 19 26 (Phone)
(34-93) 542 17 46 (Fax)

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