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Advantageous Selection in Insurance Markets
David de Meza and David C. Webb
The RAND Journal of Economics
Vol. 32, No. 2 (Summer, 2001), pp. 249-262
Stable URL: http://www.jstor.org/stable/2696408
Page Count: 14
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This article reverses the standard conclusion that asymmetric information plus competition results in insufficient insurance provision. Risk-tolerant individuals take few precautions and are disinclined to insure, but they are drawn into a pooling equilibrium by the low premiums created by the presence of safer, more risk-averse types. Taxing insurance drives out the reckless clients, allowing a strict Pareto gain. This result depends on administrative costs in processing claims and issuing policies, as does the novel finding of a pure-strategy, partial-pooling, subgame-perfect Nash equilibrium in the insurance market.
The RAND Journal of Economics © 2001 RAND Corporation