Misinformation and Equilibrium in Insurance Markets

Abstract

This chapter is concerned with the role of misinformation by firms and consumers with respect to the selling and buying of insurance. Our interest is in the relationship between the accuracy of consumer beliefs and the relative performance of the market system and social programmes. Such an investigation requires us to determine under what conditions a stable market equilibrium exists and, if it does, what type of insurance policies are offered to consumers. We can then contrast these market outcomes with premium regulation or some form of required insurance coverage.

The research in this paper is supported by NSF Grant No. 5-22669 and in part by the Bundesministerium fuer Forschung and Technologie, FRG, contract no. 321/7591 /RGB 8001. While support for this work is gratefully acknowledged, the views expressed are the authors’ and not necessarily shared by the sponsor. The authors would also like to express their appreciation to Uday Apte for his computational assistance and to Michael Rothschild and Joseph Stiglitz, and the participants in the Conference on the Economics of Regulation in Berlin, for their helpful comments on an earlier draft.