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Licensed Unlicensed Requires Authentication Published by De Gruyter August 6, 2003

Adverse Selection and Insurance Contracting: A Rank-Dependent Utility Analysis

Matthew Joseph Ryan and Rhema Vaithianathan

Stiglitz (1977) established three well-known features of monopoly insurance markets subject to adverse selection: (i) at least one market segment is served, despite the informational asymmetry; (ii) there is always some screening of risk classes; and (iii) efficiency is sacrificed to achieve screening. We modify Stiglitz’s model, replacing his expected utility assumption on consumer behavior with a version of Quiggin’s (1982) rank-dependent utility model that has received strong experimental support. We show that none of the conclusions (i)—(iii) is robust to this revision. In particular, asymmetric information need not lead to any loss in efficiency.

Published Online: 2003-8-6

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