Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/76168
Authors: 
Breuer, Michael
Year of Publication: 
2004
Series/Report no.: 
Working Paper, Socioeconomic Institute, University of Zurich 0401
Abstract: 
The standard solution to adverse selection is the separating equilibrium introduced by Rothschild and Stiglitz. Usually, the Rothschild-Stiglitz argument is developed in a model that allows for two states of the world only. In this paper adverse selection is dis-cussed for continuous loss distributions. This gives rise to the new problem of finding the proper form of an insurance contract to impose partial insurance of the low risks. This paper contributes to the discussion on optimal insurance. It analyzes two basic forms of insurance contracts: A contract with a deductible and a contract imposing a positive co-insurance rate. Since high risks can always self-reveal themselves as high risks and buy the optimal insurance contract at high risks' premiums the Pareto-superior insurance contract is the one that leaves the low risks with higher expected utility while deterring high risks from joining the contract that is designed for low risks. The deductible contract turns out to be superior if premiums contain a sufficiently high loading.
Subjects: 
Insurance
Adverse Selection
Deductible
Co-Insurance
JEL: 
D81
D82
D62
Document Type: 
Working Paper

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