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Asian Review of Financial Research, Vol., No..
pp.406~433
pp.406~433
Insurance and Risk Selection when Insurable Asset and Income are Separable
Kyungsun Kim Seoul National University Business School
S. Hun Seog Seoul National University Business School
This paper develops an endogenous selection model under asymmetric information, in which risk types are endogenously determined by individuals. By assuming heterogeneity in asset sensitivity that inheres in a two-argument utility function, we find that in equilibrium, an asset sensitive type of individual may invest in self-protection and become a low-risk, whereas an insensitive type never chooses to expend effort. Unlike the standard model of Rothschild and Stiglitz (1976), the present study demonstrates that the sensitive type (low-risk) demands more insurance than the insensitive type (high-risk) under advantageous selection. We also find other types of equilibrium such as adverse selection, separating equilibrium for a single premium rate, partial pooling equilibrium, and pooling equilibrium. In contrast to all previous papers, the equilibrium results obtained in this study reflect the reality that individuals make trade-offs between an income and an insurable asset.
Kyungsun Kim
S. Hun Seog
This paper develops an endogenous selection model under asymmetric information, in which risk types are endogenously determined by individuals. By assuming heterogeneity in asset sensitivity that inheres in a two-argument utility function, we find that in equilibrium, an asset sensitive type of individual may invest in self-protection and become a low-risk, whereas an insensitive type never chooses to expend effort. Unlike the standard model of Rothschild and Stiglitz (1976), the present study demonstrates that the sensitive type (low-risk) demands more insurance than the insensitive type (high-risk) under advantageous selection. We also find other types of equilibrium such as adverse selection, separating equilibrium for a single premium rate, partial pooling equilibrium, and pooling equilibrium. In contrast to all previous papers, the equilibrium results obtained in this study reflect the reality that individuals make trade-offs between an income and an insurable asset.