Hidden regret in insurance markets

Rachel J. Huang, Alexander Muermann, Larry Y. Tzeng

Research output: Contribution to journalArticlepeer-review

9 Scopus citations

Abstract

We examine insurance markets with two-dimensional asymmetric information on risk type and on preferences related to regret. In contrast to Rothschild and Stiglitz (), the equilibrium can be efficient; that is, it can coincide with the equilibrium under full information. Furthermore, we show that pooling, semipooling, and separating equilibria can exist. Specifically, there exist separating equilibria that predict a positive correlation between the level of insurance coverage and risk type, as in the standard economic models of adverse selection, but there also exist separating equilibria that predict a negative correlation between the level of insurance coverage and risk type. Since optimal choice of regretful customers depends on foregone alternatives, the equilibrium includes a contract that is offered but not purchased.

Original languageEnglish
Pages (from-to)181-216
Number of pages36
JournalJournal of Risk and Insurance
Volume83
Issue number1
DOIs
StatePublished - 1 Mar 2016

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