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Optimal insurance with adverse selection and comonotonic background risk

Alary, David; Bien, Franck (2007), Optimal insurance with adverse selection and comonotonic background risk. https://basepub.dauphine.fr/handle/123456789/20300

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Type
Document de travail / Working paper
Date
2007
Series title
Document de travail LERNA
Series number
8
Published in
Toulouse
Pages
7
Metadata
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Author(s)
Alary, David

Bien, Franck
Laboratoire d'Economie de Dauphine [LEDa]
Abstract (EN)
In this note, we consider an adverse selection problem involving an insurance market à la Rothschild-Stiglitz. We assume that part of the loss is uninsurable as in the case with health care or environmental risk. We characterize sufficient conditions such that adverse selection by itself does not distort competitive insurance contracts. A sufficiently large uninsurable loss provides an incentive to high-risk policy holders not to mimic low-risk policy holders without distorting the optimal coverage.
Subjects / Keywords
Adverse Selection; Background risk; Optimal Contract
JEL
D82 - Asymmetric and Private Information; Mechanism Design