Information Design in Insurance Markets: Selling Peaches in a Market for Lemons

44 Pages Posted: 28 Aug 2017 Last revised: 6 Jan 2018

See all articles by Daniel Garcia

Daniel Garcia

University of Vienna

Roee Teper

Tel Aviv University

Matan Tsur

University of Vienna

Multiple version iconThere are 2 versions of this paper

Date Written: January 4, 2018

Abstract

This paper characterizes the optimal information structure in insurance markets in the presence of adverse selection. The optimal information structure minimizes ex-post risk subject to a participation constraint for insurees and a break-even constraint from insurers. In the unique optimal information structure, trade occurs with probability one and different risk-types are pooled together in the same signal. Surprisingly, these signals are not monotone so that low types are pooled with high types, while intermediate types are bundled together. We provide a simple algorithm that delivers the optimal information structure and derive comparative statics. We explore some applications and generalizations.

Keywords: Insurance Markets, Adverse Selection, Information Design

JEL Classification: D82, G22, I13

Suggested Citation

Garcia, Daniel and Teper, Roee and Tsur, Matan, Information Design in Insurance Markets: Selling Peaches in a Market for Lemons (January 4, 2018). Available at SSRN: https://ssrn.com/abstract=3024500 or http://dx.doi.org/10.2139/ssrn.3024500

Daniel Garcia (Contact Author)

University of Vienna ( email )

Bruenner Strasse 72
Vienna, Vienna 1090
Austria

Roee Teper

Tel Aviv University ( email )

Ramat Aviv
Tel-Aviv, 6997801
Israel

Matan Tsur

University of Vienna ( email )

Bruenner Strasse 72
Vienna, Vienna 1090
Austria

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
58
Abstract Views
491
rank
318,283
PlumX Metrics