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Facilitating Consumer Learning in Insurance Markets - What Are the Welfare Effects?

Author

Listed:
  • Johan N. M. Lagerlöf

    (Department of Economics, Copenhagen University)

  • Christoph Schottmüller

    (Department of Economics, Tilburg University)

Abstract
What are the welfare effects of a policy that facilitates for insurance customers to privately and covertly learn about their accident risks? We endogenize the information structure in Stiglitz's classic monopoly insurance model. We first show that his results are robust: For a small information acquisition cost c, the consumer gathers information and the optimal contracts are close to the ones in the Stiglitz model. If c is so low that the consumer already gathers information (c c*, marginally reducing c hurts the insurer and weakly benefits the consumer. Paradoxically, a reduction in c that is "successful," meaning that the consumer gathers information after the reduction but not before it, can hurt both parties. The reasons for this are that, after the reduction, (i) the cost is actually incurred and (ii) the contracts can be more distorted.

Suggested Citation

  • Johan N. M. Lagerlöf & Christoph Schottmüller, 2013. "Facilitating Consumer Learning in Insurance Markets - What Are the Welfare Effects?," Discussion Papers 13-12, University of Copenhagen. Department of Economics.
    • Handle: RePEc:kud:kuiedp:1312
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    References listed on IDEAS

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    Cited by:

    1. Johan N.M. Lagerlöf & Christoph Schotmüller, 2013. "Monopoly Insurance with Endogenous Information," Discussion Papers 13-15, University of Copenhagen. Department of Economics.

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    More about this item

    Keywords

    asymmetric information; information acquisition; insurance; screening; adverse selection;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private

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