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Contracting with Present-Biased Consumers in Insurance Markets
Ai, Jing1; Zhao, Lin2; Zhu, Wei3
2016-09-01
Source PublicationGeneva Risk and Insurance Review
ISSN1554-964X
Volume41Issue:2Pages:107-148
AbstractPresent bias challenges consumers with self-control problems when they implement precautionary efforts in insurance markets. To explore how rational insurance companies respond to this bias, this paper analyzes a contract design problem in a monopolistic insurance market with ex ante moral hazard. Weconsider two types of consumers with this bias: the "naifs", who do not foresee the present bias and make decisions in a myopic way, and the "sophisticates", who foresee the bias and incorporate it in the decision process. Relative to the benchmark case where consumers are time-consistent, we show that (i) present bias reduces the monopoly profit, regardless of the consumer type; (ii) present bias can either reduce or increase the coverage of the profit-maximizing insurance contract depending on the extent of the bias; and (iii) when present bias is severe, the insurance company can profitably exploit naifs but not sophisticates. These results still hold when consumers are heterogeneous and their types are unknown to the insurance company.
Keywordpresent bias time-inconsistent preference self-control consumer naivete moral hazard insurance market
DOI10.1057/s10713-016-0011-2
Language英语
Funding ProjectNational Science Foundation of China (NSFC)[71301161] ; National Science Foundation of China (NSFC)[71532013] ; National Science Foundation of China (NSFC)[71201029] ; National Science Foundation of China (NSFC)[71373044] ; Fundamental Research Funds for the Central Universities in UIBE[CXTD5-04]
WOS Research AreaBusiness & Economics
WOS SubjectBusiness, Finance ; Economics
WOS IDWOS:000392921300001
PublisherPALGRAVE MACMILLAN LTD
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Document Type期刊论文
Identifierhttp://ir.amss.ac.cn/handle/2S8OKBNM/24627
Collection系统科学研究所
Affiliation1.Univ Hawaii Manoa, Shidler Coll Business, 2404 Maile Way, Honolulu, HI 96822 USA
2.Chinese Acad Sci, Acad Math & Syst Sci, Beijing 100190, Peoples R China
3.Univ Int Business & Econ, Sch Insurance & Econ, Beijing 100029, Peoples R China
Recommended Citation
GB/T 7714
Ai, Jing,Zhao, Lin,Zhu, Wei. Contracting with Present-Biased Consumers in Insurance Markets[J]. Geneva Risk and Insurance Review,2016,41(2):107-148.
APA Ai, Jing,Zhao, Lin,&Zhu, Wei.(2016).Contracting with Present-Biased Consumers in Insurance Markets.Geneva Risk and Insurance Review,41(2),107-148.
MLA Ai, Jing,et al."Contracting with Present-Biased Consumers in Insurance Markets".Geneva Risk and Insurance Review 41.2(2016):107-148.
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