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Risks 2015, 3(3), 277-289; doi:10.3390/risks3030277

Monopolistic Insurance and the Value of Information

Department of Economics, University of Georgia, Athens, GA 30602, USA
Academic Editor: Georges Dionne
Received: 17 April 2015 / Accepted: 10 July 2015 / Published: 24 July 2015
(This article belongs to the Special Issue Information and market efficiency)
View Full-Text   |   Download PDF [489 KB, uploaded 27 July 2015]

Abstract

The value of information regarding risk class for a monopoly insurer and its customers is examined in both symmetric and asymmetric information environments. A monopolist always prefers contracting with uninformed customers as this maximizes the rent extracted under symmetric information while also avoiding the cost of adverse selection when information is held asymmetrically. Although customers are indifferent to symmetric information when they are initially uninformed, they prefer contracting with hidden knowledge rather than symmetric information since the monopoly responds to adverse selection by sharing gains from trade with high-risk customers when low risks are predominant in the insurance pool. However, utilitarian social welfare is highest when customers are uninformed, and is higher when information is symmetric rather than asymmetric. View Full-Text
Keywords: adverse selection; rent extraction; interim efficiency; JEL classification: D42; D82; G22 adverse selection; rent extraction; interim efficiency; JEL classification: D42; D82; G22
This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).

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Snow, A. Monopolistic Insurance and the Value of Information. Risks 2015, 3, 277-289.

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