Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5066534 | European Economic Review | 2016 | 28 Pages |
Abstract
We study a competitive insurance market in which some consumers have too optimistic expectations regarding their future use of preventive measures. When contracts are long-term and inflexible, such naive consumers would increase the costs of insurance for low-risk consumers. The competitive insurance market therefore offers flexible contracts that allow for switching between different tariffs. Sophisticated consumers choose a partial insurance tariff and remain low-risks. Naive consumers choose the same tariff, but later switch to full insurance, and become high-risks. If there are sufficiently many naive consumers, they pay a transfer to sophisticated consumers (so that high-risks subsidize low-risks). In contrast, there are no such transfers when contracts are short-term. The model generates novel implications for the time frame of insurance contracts and insurance requirements.
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Heiner Schumacher,