Optimal Insurance with Adverse Selection ∗

@inproceedings{Chade2007OptimalIW,
  title={Optimal Insurance with Adverse Selection ∗},
  author={Hector Chade},
  year={2007}
}
We solve the principal-agent problem of a monopolist insurer selling to an agent whose riskiness (chance of a loss) is private information, a problem introduced in Stiglitz (1977)’s seminal paper. We prove several properties of optimal menus: the highest type gets full coverage (efficiency at the top), all other types are underinsured (downward distortions elsewhere), the contract is nonnegative and there are always gains to trade. The main novelty here is that we prove these basic properties… CONTINUE READING
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