Information Asymmetries and Informational Incentives in Monopolistic Insurance Markets

JOURNAL OF RISK AND UNCERTAINTY, Vol. 13, No. 3, September 1996

Posted: 1 Oct 1996

See all articles by James A. Ligon

James A. Ligon

University of Alabama

Paul D. Thistle

University of Nevada, Las Vegas - Department of Finance

Abstract

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

Ligon, James A. and Thistle, Paul D., Information Asymmetries and Informational Incentives in Monopolistic Insurance Markets. JOURNAL OF RISK AND UNCERTAINTY, Vol. 13, No. 3, September 1996. Available at SSRN: https://ssrn.com/abstract=3449

James A. Ligon (Contact Author)

University of Alabama ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States
205-348-6313 (Phone)
205-348-0590 (Fax)

Paul D. Thistle

University of Nevada, Las Vegas - Department of Finance ( email )

4505 S. Maryland Parkway
Las Vegas, NV 89154
United States
702-895-3856 (Phone)
702-895-4650 (Fax)

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