Optimal insurance: dual utility, random losses and adverse selection
Optimal insurance: dual utility, random losses and adverse selection
We study a generalization of the classical monopoly insurance problem under adverse selection (see Stiglitz 1977) where we allow for a random distribution of losses, possibly correlated with the agent's risk parameter that is private information. Our model explains patterns of observed customer behavior and predicts insurance contracts most often observed in practice: these consist of menus of several deductible-premium pairs or menus of insurance with coverage limits–premium pairs. A main departure from the classical insurance literature is obtained here by endowing the agents with risk-averse preferences that can be represented by a dual utility functional (Yaari 1987).
2581-2614
Gershkov, Alex
214a0b5e-c742-486d-b910-c8ec702c943a
Moldovanu, Benny
f84fdd42-3143-4219-be24-fb26385b106d
Strack, Philipp
35074b36-f2b6-439e-bc94-8f469f83d474
Zhang, Mengxi
862887d0-ad62-42e3-bf3d-6b82a872347c
1 October 2023
Gershkov, Alex
214a0b5e-c742-486d-b910-c8ec702c943a
Moldovanu, Benny
f84fdd42-3143-4219-be24-fb26385b106d
Strack, Philipp
35074b36-f2b6-439e-bc94-8f469f83d474
Zhang, Mengxi
862887d0-ad62-42e3-bf3d-6b82a872347c
Gershkov, Alex, Moldovanu, Benny, Strack, Philipp and Zhang, Mengxi
(2023)
Optimal insurance: dual utility, random losses and adverse selection.
American Economic Review, 113 (10), .
(doi:10.1257/aer.20221247).
Abstract
We study a generalization of the classical monopoly insurance problem under adverse selection (see Stiglitz 1977) where we allow for a random distribution of losses, possibly correlated with the agent's risk parameter that is private information. Our model explains patterns of observed customer behavior and predicts insurance contracts most often observed in practice: these consist of menus of several deductible-premium pairs or menus of insurance with coverage limits–premium pairs. A main departure from the classical insurance literature is obtained here by endowing the agents with risk-averse preferences that can be represented by a dual utility functional (Yaari 1987).
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Published date: 1 October 2023
Identifiers
Local EPrints ID: 503780
URI: http://eprints.soton.ac.uk/id/eprint/503780
ISSN: 0002-8282
PURE UUID: 05d45937-509a-4c4d-b0cf-2d8716ae4854
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Date deposited: 12 Aug 2025 17:15
Last modified: 13 Aug 2025 03:04
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Contributors
Author:
Alex Gershkov
Author:
Benny Moldovanu
Author:
Philipp Strack
Author:
Mengxi Zhang
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