Optimal Insurance Under Adverse Selection and Ambiguity Aversion

Koufopoulos, Kostas; Kozhan, Roman

doi:10.2139/ssrn.1732268

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Optimal Insurance Under Adverse Selection and Ambiguity Aversion

WBS Finance Group Research Paper No. 148

25 Pages Posted: 31 Dec 2010 Last revised: 23 Dec 2019

See all articles by Kostas Koufopoulos

Roman Kozhan

University of Warwick - Warwick Business School

There are 2 versions of this paper

Date Written: April 1, 2012

Abstract

We consider a model of competitive insurance markets under asymmetric information with ambiguity-averse agents who maximize their maxmin expected utility. The interaction between asymmetric information and ambiguity aversion gives rise to some interesting results. First, for some parameter values, there exists a unique pooling equilibrium where both types of insurees buy full insurance. Second, in separating equilibria where the low risks are underinsured their equilibrium contract involves more coverage than under standard expected utility. Due to the endogeneity of commitment to the contracts offered by insurers, our model has always an equilibrium which is unique and interim incentive efficient (second-best).

Keywords: Adverse Selection, Ambiguity Aversion, Endogenous Commitment

JEL Classification: D82, G22

Suggested Citation: Suggested Citation

Koufopoulos, Kostas and Kozhan, Roman, Optimal Insurance Under Adverse Selection and Ambiguity Aversion (April 1, 2012). WBS Finance Group Research Paper No. 148, Available at SSRN: https://ssrn.com/abstract=1732268 or http://dx.doi.org/10.2139/ssrn.1732268