MONOPOLY INSURANCE AND ENDOGENOUS INFORMATION |
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| Authors: | Johan N M Lagerlöf Christoph Schottmüller |
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| Institution: | 1. University of Copenhagen, Denmark;2. TILEC, The NetherlandsWe are grateful for helpful comments from three anonymous referees, the editor Hanming Fang, and seminar audiences at the University of Copenhagen, Humboldt University Berlin, TILEC (at Tilburg University), EARIE 2013 (in évora, Portugal), EEA 2014 (in Toulouse, France), and RES 2015 (in Manchester, U.K.). Please address correspondence to: Christoph Schottmüller, Department of Economics, University of Copenhagen, ?ster Farimagsgade 5, Building 26, DK‐1353 Copenhagen K, Denmark;3. E‐mail: . |
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| Abstract: | We study a monopoly insurance model with endogenous information acquisition. Through a continuous effort choice, consumers can determine the precision of a privately observed signal that is informative about their accident risk. The equilibrium effort is, depending on parameter values, either zero (implying symmetric information) or positive (implying privately informed consumers). Regardless of the nature of the equilibrium, all offered contracts, also at the top, involve underinsurance, which discourages information gathering. We identify a missorting effect that explains why the insurer wants to discourage information acquisition. Moreover, lower information gathering costs can hurt both consumer and insurer. |
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