Overconfidence and asymmetric information: The case of insurance

Alvaro Sandroni*, Francesco Squintani

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

27 Scopus citations

Abstract

This paper contributes to the recent behavioral economics literature by showing that whether or not overconfidence changes qualitative predictions in asymmetric information markets may depend on the market structure itself. We first show that overconfidence may overturn fundamental relations between observable variables in perfect-competition asymmetric information insurance markets. In monopolistic insurance markets, in constrast, we find that overconfidence may be observationally equivalent to variations in the risk composition of the economy. Our analysis provides a number of novel testable implications on (i) price heterogeneity within and across risk classes, (ii) the relationship between ex-post risk and insurance coverage, (iii) the fact that a significant fraction of agents chooses to be uninsured, and (iv) the relationship between underinsurance and age.

Original languageEnglish (US)
Pages (from-to)149-165
Number of pages17
JournalJournal of Economic Behavior and Organization
Volume93
DOIs
StatePublished - Sep 2013

Keywords

  • Asymmetric Information
  • Insurance
  • Overconfidence

ASJC Scopus subject areas

  • Economics and Econometrics
  • Organizational Behavior and Human Resource Management

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