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Optimal Insurance: Dual Utility, Random Losses, and Adverse Selection

Resource type
Authors/contributors
Title
Optimal Insurance: Dual Utility, Random Losses, and Adverse Selection
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).
Publication
American Economic Review
Volume
113
Issue
10
Pages
2581-2614
Date
2023-10
Citation
Gershkov, A., Moldovanu, B., Strack, P., & Zhang, M. (2023). Optimal Insurance: Dual Utility, Random Losses, and Adverse Selection. American Economic Review, 113, 2581–2614.
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