Optimal Insurance: Dual Utility, Random Losses, and Adverse Selection

Alex Gershkov, Benny Moldovanu, Philipp Strack, Mengxi Zhang*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

Abstract

We study a generalization of the classical monopoly insurance problem under adverse selection (see Stiglitz 1977) where we allow for a random distribution of losses, possibly correlated with the agent’s risk parameter that is private information. Our model explains patterns of observed customer behavior and predicts insurance contracts most often observed in practice: these consist of menus of several deductible-premium pairs or menus of insurance with coverage limits–premium pairs. A main departure from the classical insurance literature is obtained here by endowing the agents with risk-averse preferences that can be represented by a dual utility functional (Yaari 1987).

Original languageAmerican English
Pages (from-to)2581-2614
Number of pages34
JournalAmerican Economic Review
Volume113
Issue number10
DOIs
StatePublished - Oct 2023

Bibliographical note

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© 2023 American Economic Association. All rights reserved.

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