Implementability in Insurance Markets with Adverse Selection
Maria Andraos, Mario Ghossoub
Abstract
We consider an insurance market with hidden information, where the agent's type is private information and is drawn from an arbitrary type space. We discuss the notion of implementability of the collection of retention functions. Namely, how to select premium schedules so that the resulting menu of contracts is incentive compatible, or truthtelling. Specifically, for general type spaces, implementability is equivalent to cyclical monotonicity of the collection of retention functions. For compact interval type spaces, we show that submodularity is a sufficient condition for implementability, under suitable type ordering assumptions. Moreover, for any implementable collection of retention functions, we characterize the corresponding premium schedule. Finally, we apply our results to several standard classes of insurance contracts, for which the general implementability conditions admit simpler characterizations, and we provide several numerical illustrations.
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