I thank Arthur Campbell, Mathias Dewatripont, Peter Diamond, Florian Ederer, Bengt Holmström, Bruno Jullien, Francesco Squintani, Frans Spinnewyn, Jean Tirole, Ivan Werning, seminar participants at MIT, Munich University, Pompeu Fabra and the EEA-ESEM meetings and the editor, Andrea Galeotti, and three anonymous referees for helpful comments and suggestions.
Insurance and Perceptions: How to Screen Optimists and Pessimists
Version of Record online: 14 JAN 2013
© 2013 The Author(s). The Economic Journal © 2013 Royal Economic Society
The Economic Journal
Volume 123, Issue 569, pages 606–633, June 2013
How to Cite
Spinnewijn, J. (2013), Insurance and Perceptions: How to Screen Optimists and Pessimists. The Economic Journal, 123: 606–633. doi: 10.1111/ecoj.12008
- Issue online: 7 JUN 2013
- Version of Record online: 14 JAN 2013
- Accepted manuscript online: 6 OCT 2012 12:03AM EST
- Manuscript Accepted: 18 SEP 2012
- Manuscript Received: 31 JAN 2012
People have very different beliefs about the risks they face. I analyse how heterogeneous risk perceptions affect the insurance contracts offered by profit-maximising firms. An essential distinction is how risk perceptions affect the willingness to pay for insurance relative to the willingness to exert risk-reducing effort. This determines both the sign of the correlation between risk and insurance coverage in equilibrium, shedding new light on a recent empirical puzzle, and the type of individuals screened by either monopolistic or competing firms. Even with perfect competition, heterogeneous risk perceptions may well strengthen the case for government intervention in insurance markets.