Optimal Insurance: Dual Utility, Random Losses, and Adverse Selection
Alex Gershkov, Benny Moldovanu, Philipp Strack, Mengxi Zhang
American Economic Review · 2023 · Volume 113 · Issue 10
Abstract
We study a generalization of the classical monopoly insurance problem under adverse selection (see Stiglitz 1977) where we allow for a random distribution of losses, possibly correlated with the agent's risk parameter that is private information. Our model explains patterns of observed customer behavior and predicts insurance contracts most often observed in practice: these consist of menus of several deductible-premium pairs or menus of insurance with coverage limits–premium pairs. A main departure from the classical insurance literature is obtained here by endowing the agents with risk-averse preferences that can be represented by a dual utility functional (Yaari 1987).
Keywords
Criteria for Decision-Making under Risk and Uncertainty, Asymmetric and Private Information, Mechanism Design, Economics of Contract: Theory, Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making, Insurance, Insurance Companies, Actuarial Studies
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