DP9753 Facilitating Consumer Learning in Insurance Markets?What Are the Welfare Effects?

Author(s): Johan N. M. Lagerlöf, Christoph Schottmüller
Publication Date: November 2013
Keyword(s): adverse selection, asymmetric information, information acquisition, insurance, screening
JEL(s): D82, I13
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9753

What are the welfare effects of a policy that facilitates for insurance customers to privately and covertly learn about their accident risks? We endogenize the information structure in Stiglitz's classic monopoly insurance model. We first show that his results are robust: For a small information acquisition cost c, the consumer gathers information and the optimal contracts are close to the ones in the Stiglitz model. If c is so low that the consumer already gathers information (cc*, marginally reducing c hurts the insurer and weakly benefits the consumer. Paradoxically, a reduction in c that is ?successful,? meaning that the consumer gathers information after the reduction but not before it, can hurt both parties. The reasons for this are that, after the reduction, (i) the cost is actually incurred and (ii) the contracts can be more distorted.