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An experimental investigation of risk sharing and adverse selection

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  • Tausch, F.

    (Microeconomics & Public Economics)

  • Potters, J.A.M.

    (Externe publicaties SBE)

  • Riedl, A.M.

    (Microeconomics & Public Economics)

Abstract

Does adverse selection hamper the effectiveness of voluntary risk sharing? How do differences in risk profiles affect adverse selection? We experimentally investigate individuals' willingness to share risks with others. Across treatments we vary how risk profiles differ between individuals. We find strong evidence for adverse selection if individuals risk profiles can be ranked according to first-order stochastic dominance and only little evidence for adverse selection if risk profiles can only be ranked on the basis of second-order stochastic dominance. We observe the same pattern also for anticipated adverse selection. These results suggest that the degree to which adverse selection erodes voluntary risk sharing arrangements crucially depends on the form of risk heterogeneity.

Suggested Citation

  • Tausch, F. & Potters, J.A.M. & Riedl, A.M., 2013. "An experimental investigation of risk sharing and adverse selection," Research Memorandum 015, Maastricht University, Graduate School of Business and Economics (GSBE).
    • Handle: RePEc:unm:umagsb:2013015
    DOI: 10.26481/umagsb.2013015
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    Cited by:

    1. Cettolin, Elena & Tausch, Franziska, 2016. "Risk taking and risk sharing: does responsibility matter? (RM/13/045-revised-)," Research Memorandum 018, Maastricht University, Graduate School of Business and Economics (GSBE).
    2. Schlag, Karl H. & van der Weele, Joël J., 2015. "A method to elicit beliefs as most likely intervals," Judgment and Decision Making, Cambridge University Press, vol. 10(5), pages 456-468, September.
    3. Asadul Islam & C. Matthew Leister & Minhaj Mahmud & Paul A. Raschky, 2020. "Natural disaster and risk-sharing behavior: Evidence from rural Bangladesh," Journal of Risk and Uncertainty, Springer, vol. 61(1), pages 67-99, August.
    4. Ronald Peeters & Leonard Wolk, 2017. "Eliciting interval beliefs: An experimental study," PLOS ONE, Public Library of Science, vol. 12(4), pages 1-15, April.
    5. Maria Carannante & Valeria D’amato & Steven Haberman & Massimiliano Menzietti, 2024. "Frailty-based mortality models and reserving for longevity risk," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 49(2), pages 320-339, April.
    6. Elena Cettolin & Franziska Tausch, 2015. "Risk taking and risk sharing: Does responsibility matter?," Journal of Risk and Uncertainty, Springer, vol. 50(3), pages 229-248, June.
    7. repec:cup:judgdm:v:10:y:2015:i:5:p:456-468 is not listed on IDEAS
    8. Andreas Richter & Jörg Schiller & Harris Schlesinger, 2014. "Behavioral insurance: Theory and experiments," Journal of Risk and Uncertainty, Springer, vol. 48(2), pages 85-96, April.

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    More about this item

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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