The Efficiency of Voluntary Risk Classification in Insurance Markets
It has been established that categorical discrimination based on observable characteristics such as gender, age, or ethnicity enhances efficiency. We consider a different form of risk classification when there exists a costless yet imperfectly informative test of risk type, with the test outcome unknown to the agents ex ante. We show that a voluntary risk classification in which agents are given the option to take the test always increases efficiency compared with no risk classification. Moreover, voluntary risk classification also Pareto dominates a regime of compulsory risk classification in which all agents are required to take the test.
This is the peer reviewed version of the following article: [Crocker, K.J., and Zhu, N. (2020). The efficiency of voluntary risk classification in insurance markets. Journal of Risk and Insurance 88, 325–350.], which has been published in final form at https://doi.org/10.1111/jori.12326. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions: https://authorservices.wiley.com/author-resources/Journal-Authors/licensing/self-archiving.html#3.
|Work Title||The Efficiency of Voluntary Risk Classification in Insurance Markets|
|License||In Copyright (Rights Reserved)|
|Publication Date||September 11, 2020|
|Publisher Identifier (DOI)||
|Deposited||January 13, 2022|
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