223040 (E10) Full insurance, bayesian updated premiums, and adverse selection : Watt R., Vazquez F.J., The Geneva Papers on Risk and Insurance Theory, 22, 1997, pp 135–150

• Publisher: Elsevier Science
• Year: 1998
• Tongue: English
• Weight: 95 KB
• Volume: 22
• Category: Article
• ISSN: 0167-6687
• DOI: 10.1016/s0167-6687(98)80100-5

✦ Synopsis

This article extends the standard adverse selection model for competitive insurance markets, which assumes a single source of risk, to the case where individuals are subject to multiple risks. The authors compare the following market situations -the case where insurers can offer comprehensive policies against all sources or risks (complete contracts) and the case where different risks are covered by separate policies (incomplete contracts). In the latter case, they consider whether the insurer of a particular risk has perfect information regarding an individual's coverage against other sources of risks. The analysis emphasizes the informational role of bundling in multidimensional screening. When the market situation allows bundling, it is shown that in equilibrium the low risk type with respect to a particular source of risk does not necessarily obtain partial coverage against that particular risk.