Information Asymmetries and Informational Incentives in Monopolistic Insurance Markets
JOURNAL OF RISK AND UNCERTAINTY, Vol. 13, No. 3, September 1996
Posted: 1 Oct 1996
This study considers a single-period monopolistic insurance market with adverse selection and moral hazard. We find that, where the distortions introduced by moral hazard are sufficiently moderate, the insurer can use price-quantity contracts as a mechanism to simultaneously deal with both information asymmetries. When no information regarding type is available, the problem is one of moral hazard with imperfect information regarding loss prevention productivity. We consider the consumer's incentive to acquire information regarding type and find that, with multiple types and nonzero optimal effort levels in the market, both pre-contract and post-contract information are valuable to consumers. Post-contract information cannot be used to separate types but does allow consumers to choose an optimal effort level. Although pre-contract information creates the adverse selection problem, consumer welfare increases because information allows modification of effort level and contract choice.
JEL Classification: D8, G22
Suggested Citation: Suggested Citation