Monopolistic Insurance and the Value of Information

• Main Author: Arthur Snow
• Format: Article
• Language: English
• Published: MDPI AG 2015-07-01
• Series: Risks
• Subjects: adverse selection; rent extraction; interim efficiency; JEL classification: D42; D82; G22
• Online Access: http://www.mdpi.com/2227-9091/3/3/277

The value of information regarding risk class for a monopoly insurer and its customers is examined in both symmetric and asymmetric information environments. A monopolist always prefers contracting with uninformed customers as this maximizes the rent extracted under symmetric information while also avoiding the cost of adverse selection when information is held asymmetrically. Although customers are indifferent to symmetric information when they are initially uninformed, they prefer contracting with hidden knowledge rather than symmetric information since the monopoly responds to adverse selection by sharing gains from trade with high-risk customers when low risks are predominant in the insurance pool. However, utilitarian social welfare is highest when customers are uninformed, and is higher when information is symmetric rather than asymmetric.