Research Article

Economic Theory

, Volume 44, Issue 2, pp 187-211

First online:

Competitive screening in insurance markets with endogenous wealth heterogeneity

  • Nick NetzerAffiliated withSocioeconomic Institute, University of Zurich
  • , Florian ScheuerAffiliated withDepartment of Economics, Massachusetts Institute of Technology Email author 

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Abstract

We examine equilibria in competitive insurance markets with adverse selection when wealth differences arise endogenously from unobservable savings or labor supply decisions. The endogeneity of wealth implies that high-risk individuals may ceteris paribus exhibit the lower marginal willingness to pay for insurance than low risks, a phenomenon that we refer to as irregular-crossing preferences. In our model, both risk and patience (or productivity) are privately observable. In contrast to the models in the existing literature, where wealth heterogeneity is exogenously assumed, equilibria in our model no longer exhibit a monotone relation between risk and coverage. Individuals who purchase larger coverage are no longer higher risks, a phenomenon frequently observed in empirical studies.

Keywords

Insurance markets Adverse selection Multidimensional screening

JEL Classification

D82 G22 J22