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Economic Theory

, Volume 62, Issue 4, pp 659–687 | Cite as

Optimal insurance under adverse selection and ambiguity aversion

  • Kostas Koufopoulos
  • Roman Kozhan
Research Article

Abstract

We consider a model of competitive insurance markets under asymmetric information with ambiguity-averse agents who maximize their maxmin expected utility. The interaction between asymmetric information and ambiguity aversion gives rise to some interesting results. First, for some parameter values, there exists a unique pooling equilibrium where both types of insurees buy full insurance. Second, in separating equilibria where the low risks are underinsured, their equilibrium contract involves more coverage than under standard expected utility. Finally, due to the endogeneity of commitment to the menus offered by insurers, our model has always an equilibrium which is unique (in terms of allocation) and interim incentive efficient (second-best).

Keywords

Adverse selection Ambiguity aversion Endogenous commitment 

JEL Classification

D82 G22 

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Copyright information

© Springer-Verlag Berlin Heidelberg 2015

Authors and Affiliations

  1. 1.Department of Banking and Financial ManagementUniversity of PiraeusPiraeusGreece
  2. 2.Warwick Business SchoolUniversity of WarwickCoventryEngland, UK

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