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We examine insurance markets in which there are two types of customers: those who regret suboptimal decisions and those who don’t. In this setting, we characterize the equilibria under hidden information about the typeof customers and hidden action. We show that both pooling and separating equilibria can exist. Furthermore, there exist separating equilibria that predict a positive correlation between the amount of insurance coverage and risk type, as in the standard economic models of adverse selection, but there also exist separating equilibria that predict a negative correlation between the amount of insurance coverage and risk type, i.e.advantageous selection. Since optimal choice of regretful customers depends on foregone alternatives, any equilibrium includes a contract which is not purchased.
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© 2007 Pension Research Council of the Wharton School of the University of Pennsylvania. All rights reserved.
Muermann gratefully acknowledges financial support of the National Institutes of Health - National Institute on Aging, Grant number P30 AG12836, the Boettner Center for Pensions and Retirement Security at the University of Pennsylvania, and National Institutes of Health — National Institute of Child Health and Development Population Research Infrastructure Program R24 HD-044964, all at the University of Pennsylvania
Date Posted: 09 August 2019