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Optimal Insurance: Dual Utility, Random losses and Adverse Selection

Author

Listed:
  • Alex Gershkov
  • Benny Moldovanu
  • Philipp Strack
  • Mengxi Zhang

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. The 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]).

Suggested Citation

  • Alex Gershkov & Benny Moldovanu & Philipp Strack & Mengxi Zhang, 2023. "Optimal Insurance: Dual Utility, Random losses and Adverse Selection," CRC TR 224 Discussion Paper Series crctr224_2023_399, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2023_399
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    File URL: https://www.crctr224.de/research/discussion-papers/archive/dp399
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    Cited by:

    1. Rivera Mora, Ernesto, 2024. "Mechanism design with belief-dependent preferences," Journal of Economic Theory, Elsevier, vol. 216(C).
    2. Alex Gershkov & Benny Moldovanu & Philipp Strack & Mengxi Zhang, 2024. "Optimal Security Design for Risk-Averse Investors," ECONtribute Discussion Papers Series 325, University of Bonn and University of Cologne, Germany.

    More about this item

    Keywords

    Insurance; Dual Utility; Random Loss;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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