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Barcelona GSE Working Paper No. 619

Title: Multidimensional Screening in a Monopolistic Insurance Market
Authors: Pau Olivella, Fred Schroyen
Date: 11-02-2012
Keywords: insurance markets, asymmetric information, screening, gender discrimination, positive correlation test
JEL Codes: D82, G22
Abstract:
In this paper, we consider a population of individuals who differ in two dimensions: their risk type (expected loss) and their risk aversion. We solve for the profit maximizing menu of contracts that a monopolistic insurer puts out on the market. First, we find that it is never optimal to fully separate all the types. Second, if heterogeneity in risk aversion is sufficiently high, then some high-risk individuals (the risk-tolerant ones) will obtain lower coverage than some low-risk individuals (the risk-averse ones). Third, we show that when the average man and woman differ only in risk aversion, gender discrimination may lead to a Pareto improvement.
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