Monopoly, Heterogeneous Beliefs and Imperfect Information: The Insurance Market
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Michiko Ogaku
Abstract
This paper questions how heterogeneity of beliefs about the probability of loss affects equilibrium insurance contracts, firm behavior, and welfare focusing especially on the effect of optimism when a monotonicity property, which is a major assumption of prior work, is violated. This paper shows that optimistic individuals could result in insurance driving out individuals who exert effort, if the fraction of such optimistic individuals is significantly large. In addition, this paper shows that optimism could have negative effects on profits of the firm even though both parties realize the asymmetry in beliefs. These results are not only consistent with empirical evidence from several insurance markets on correlation of risk and coverage, but also simply align themselves with empirical evidence on the tendencies of people to be unrealistically optimistic.
Acknowledgements
The author is thankful for the helpful comments from two anonymous referees, Mahito Okura, Jiahua Xu as well as from the participants at the 2018 APRIA conference. The author acknowledges financial support from the Ishii Memorial Security Research Promotion Foundation.
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Articles in the same Issue
- Featured Articles
- Graphic and Numerical Evolution of a Bonus-Malus System via Markov Chain Models
- Dynamic Hedging Strategies Based on Changing Pricing Parameters for Compound Ratchets
- Analysis of Cost Efficiency of Indian Life Insurers: A comparison of Quantity vs Value based DEA Approach
- Allocating Overseas: Risk Assessment of Currency Hedging in Taiwan Life Insurance Industry
- On Three Standard Results in the Theory of Insurance Demand
- Monopoly, Heterogeneous Beliefs and Imperfect Information: The Insurance Market
- Does Captive Insurance Improve Firm Value? Evidence from S&P 500 Companies
- Actuarial Modeling and Analysis of the Hong Kong Life Annuity Scheme
