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Welfare-improving ambiguity in insurance markets with asymmetric information
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Koufopoulos, Kostas and Kozhan, Roman (2014) Welfare-improving ambiguity in insurance markets with asymmetric information. Journal of Economic Theory, Volume 151 . pp. 551-560. doi:10.1016/j.jet.2013.11.003 ISSN 0022-0531.
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Official URL: http://dx.doi.org/10.1016/j.jet.2013.11.003
Abstract
We consider a model of competitive insurance markets involving both asymmetric information and ambiguity about the accident probability. We show that there can exist a full-insurance pooling equilibrium. We also present an example where an increase in ambiguity leads to a strict Pareto improvement. Higher ambiguity relaxes high-risks' incentive compatibility constraint and allows low risks to buy more insurance. Higher ambiguity also deteriorates low risks' expected utility from holding an uncertain prospect. If the former effect dominates, the expected utility of low risks increases and given that high risks' utility remains unaffected, the increase in ambiguity implies a strict Pareto improvement.
Item Type: | Journal Article | ||||||||||
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Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group | ||||||||||
Journal or Publication Title: | Journal of Economic Theory | ||||||||||
Publisher: | Instituto Valenciano de Investigaciones Econ�micas | ||||||||||
ISSN: | 0022-0531 | ||||||||||
Official Date: | May 2014 | ||||||||||
Dates: |
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Volume: | Volume 151 | ||||||||||
Page Range: | pp. 551-560 | ||||||||||
DOI: | 10.1016/j.jet.2013.11.003 | ||||||||||
Status: | Peer Reviewed | ||||||||||
Publication Status: | Published | ||||||||||
Access rights to Published version: | Restricted or Subscription Access |
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