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Journal of Risk and Uncertainty

, Volume 38, Issue 1, pp 73–86 | Cite as

Adverse selection, moral hazard and propitious selection

  • Philippe De DonderEmail author
  • Jean Hindriks
Article

Abstract

We propose a simple model with preference-based adverse selection and moral hazard that formalizes the cherry picking/propitious selection argument. This argument assumes that individuals differ in risk aversion, potentially resulting in more risk averse agents buying more insurance while being less risky. The propitious selection argument is summarized by two properties: regularity (more risk averse agents exert more caution) and single-crossing (more risk averse agents have a higher willingness to pay for insurance). We show that these assumptions are incompatible with a pooling equilibrium, and that they do not imply a negative correlation between risk and insurance coverage at equilibrium.

Keywords

Cherry picking Propitious selection Advantageous selection Precaution choice Social insurance 

JEL Classifications

D82 G22 

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Copyright information

© Springer Science+Business Media, LLC 2008

Authors and Affiliations

  1. 1.Toulouse School of Economics (GREMAQ-CNRS & IDEI)ToulouseFrance
  2. 2.Department of Economics and COREUniversité Catholique de LouvainLouvain-la-NeuveBelgium

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