@article{b4244614fded43b7a56653958c789cc9,
title = "Insurance as a lemons market: Coverage denials and pooling",
abstract = "The standard monopoly insurance model with adverse selection implies that there are always gains to trade, that only the best (unobservable) risks can go uninsured, and that a profit-maximizing menu cannot pool all types. We show that insurance-provision costs can explain both coverage denials only to those likely to be the worst risks and complete pooling. Specifically, we prove a general comparative statics theorem formalizing coverage denials only to those deemed to be the worst risks; and two theorems showing that the insurer offers a single contract (complete pooling), with either zero or positive coverage. We point out some implications of these results for empirical work on insurance. Our results expand upon a point made by Hendren (2013), that the main effect of adverse selection on insurance might not be misallocation in active markets – the traditional emphasis after Rothschild and Stiglitz (1976) – but simply in shutting down markets, as in Akerlof (1970) classic lemons model.",
keywords = "Adverse selection, Coverage denials, Insurance, Loading, Pooling",
author = "Hector Chade and Schlee, {Edward E.}",
note = "Funding Information: A previous version was entitled “Coverage Denied: Excluding Bad Risks, Inefficiency, and Pooling in Insurance.” We thank three referees and the Associate Editor for comments that improved our exposition. We are especially grateful to Dan Silverman for many comments and discussions. We also thank Camelia Bejan, Philip Bond, Yann Braouezec, Sandro Brusco, Ying Chen, Rohan Dutta, Liran Einav, Nathaniel Hendren, Fahad Khalil, Ilse Lindenlaub, George Mailath, Mihai Manea, Alejandro Manelli, Peter Norman, Asaf Plan, Fran{\c c}ois Salani{\'e}, Andy Skrzypacz, conference participants at the 2013 SAET conference, Economic Theory Workshop at the University of Montreal, 2015 SWET conference, 2015 CEPET conference, 2015 World Congress of the Econometric Society, the 2018 NSF/CEME Decentralization Conference at Duke, and seminar participants at Arizona State, Arizona, Johns Hopkins, Michigan State, Kentucky, Ryerson, SUNY-Stony Brook, Washington–Bothell, Washington–Seattle, the St. Louis Fed, Universidad Catolica de Chile, and Universitat Pompeu Fabra for comments and discussions. Schlee's research was supported in part by grants from the W.P. Carey School at Arizona State University, and by a grant from the Toulouse School of Economics. Part of this work was done during Schlee's visit to Johns Hopkins University in the Spring of 2012, and Chade's visit to Pompeu Fabra in the Summer of 2012. Funding Information: A previous version was entitled “Coverage Denied: Excluding Bad Risks, Inefficiency, and Pooling in Insurance.” We thank three referees and the Associate Editor for comments that improved our exposition. We are especially grateful to Dan Silverman for many comments and discussions. We also thank Camelia Bejan, Philip Bond, Yann Braouezec, Sandro Brusco, Ying Chen, Rohan Dutta, Liran Einav, Nathaniel Hendren, Fahad Khalil, Ilse Lindenlaub, George Mailath, Mihai Manea, Alejandro Manelli, Peter Norman, Asaf Plan, Fran{\c c}ois Salani{\'e}, Andy Skrzypacz, conference participants at the 2013 SAET conference, Economic Theory Workshop at the University of Montreal, 2015 SWET conference, 2015 CEPET conference, 2015 World Congress of the Econometric Society, the 2018 NSF/CEME Decentralization Conference at Duke, and seminar participants at Arizona State, Arizona, Johns Hopkins, Michigan State, Kentucky, Ryerson, SUNY-Stony Brook, Washington–Bothell, Washington–Seattle, the St. Louis Fed, Universidad Catolica de Chile, and Universitat Pompeu Fabra for comments and discussions. Schlee's research was supported in part by grants from the W.P. Carey School at Arizona State University , and by a grant from the Toulouse School of Economics . Part of this work was done during Schlee's visit to Johns Hopkins University in the Spring of 2012, and Chade's visit to Pompeu Fabra in the Summer of 2012. Publisher Copyright: {\textcopyright} 2020 Elsevier Inc.",
year = "2020",
month = sep,
doi = "10.1016/j.jet.2020.105085",
language = "English (US)",
volume = "189",
journal = "Journal of Economic Theory",
issn = "0022-0531",
publisher = "Academic Press Inc.",
}