The efficiency of voluntary risk classification in insurance markets

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3 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)325-350
Number of pages26
JournalJournal of Risk and Insurance
Volume88
Issue number2
DOIs
StatePublished - Jun 2021

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

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