Monopoly Insurance with Endogenous Information

39 Pages Posted: 10 Dec 2013

See all articles by Johan N. M. Lagerlöf

Johan N. M. Lagerlöf

University of Copenhagen - Department of Economics

Christoph Schottmüller

University of Cologne; Tilburg Law and Economics Center (TILEC)

Multiple version iconThere are 3 versions of this paper

Date Written: December 2013

Abstract

We study a monopoly insurance model with endogenous information acquisition. Through a continuous effort choice, consumers can determine the precision of a privately observed signal that is informative about their accident risk. The equilibrium effort is, depending on parameter values, either zero (implying symmetric information) or positive (implying privately informed consumers). Regardless of the nature of the equilibrium, all offered contracts, also at the top, involve underinsurance. The reason is that underinsurance at the top discourages information gathering. We identify a sorting effect that explains why the insurer wants to discourage information acquisition. Moreover, a public policy that decreases the information gathering costs can hurt both parties. Lower information gathering costs can harm consumers because the insurer adjusts the optimal contract menu in an unfavorable manner.

Keywords: adverse selection, asymmetric information, information acquisition, insurance, screening

JEL Classification: D82, I13

Suggested Citation

Lagerlof, Johan N. M. and Schottmüller, Christoph and Schottmüller, Christoph, Monopoly Insurance with Endogenous Information (December 2013). CEPR Discussion Paper No. DP9774, Available at SSRN: https://ssrn.com/abstract=2365829

Johan N. M. Lagerlof (Contact Author)

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark

HOME PAGE: http://www.johanlagerlof.com/

Christoph Schottmüller

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

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