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Journal of Risk and Uncertainty

, Volume 48, Issue 2, pp 167–186 | Cite as

An experimental investigation of risk sharing and adverse selection

  • Franziska Tausch
  • Jan Potters
  • Arno Riedl
Article

Abstract

Does adverse selection hamper the effectiveness of voluntary risk sharing? How do differences in risk profiles affect adverse selection? We experimentally investigate individuals’ willingness to share risks with others. Across treatments we vary how risk profiles differ between individuals. We find strong evidence for adverse selection if individuals’ risk profiles can be ranked according to first-order stochastic dominance and only little evidence for adverse selection if risk profiles can only be ranked according to mean-preserving spreads. We observe the same pattern also for anticipated adverse selection. These results suggest that the degree to which adverse selection erodes voluntary risk sharing arrangements crucially depends on the form of risk heterogeneity.

Keywords

Adverse selection Risk sharing Experiments Risk heterogeneity 

JEL Classification

D81 C91 

Notes

Acknowledgments

We are grateful to the associate editor and an anonymous referee for very helpful comments. Financial support by the Network for Studies on Pensions, Aging and Retirement (Netspar) is gratefully acknowledged.

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Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  1. 1.Department of Economics (AE1) and NetsparMaastricht UniversityMaastrichtthe Netherlands
  2. 2.CentER, Tilburg Univerity and NetsparTilburgthe Netherlands
  3. 3.Department of Economics (AE1)CESifo, IZA, Netspar and Maastricht UniversityMaastrichtthe Netherlands

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