TY - JOUR

T1 - Extraction of surplus under adverse selection

T2 - The case of insurance markets

AU - Landsberger, Michael

AU - Meilijson, Isaac

PY - 1996/4

Y1 - 1996/4

N2 - We consider a principal-agent setting with two types of risk averse agents with different abilities to avoid losses. Abilities (types) are characterized by two distributions F and G which are agents' private information. All agents have the same increasing and strictly concave utility function U, under which G has a higher certainty equivalent. In this environment we derive a characterization of pairs of distributions under which a first best outcome can be achieved or approximated. We prove that a first best outcome can be achieved if and only if the distribution F is not absolutely continuous with respect to the distribution G. If this condition is not satisfied, the first best outcome can be approximated (arbitrarily close) if and only if the likelihood ratio dF/dG is unbounded. Journal of Economic Literature Classification Number: D82.

AB - We consider a principal-agent setting with two types of risk averse agents with different abilities to avoid losses. Abilities (types) are characterized by two distributions F and G which are agents' private information. All agents have the same increasing and strictly concave utility function U, under which G has a higher certainty equivalent. In this environment we derive a characterization of pairs of distributions under which a first best outcome can be achieved or approximated. We prove that a first best outcome can be achieved if and only if the distribution F is not absolutely continuous with respect to the distribution G. If this condition is not satisfied, the first best outcome can be approximated (arbitrarily close) if and only if the likelihood ratio dF/dG is unbounded. Journal of Economic Literature Classification Number: D82.

UR - http://www.scopus.com/inward/record.url?scp=0030118661&partnerID=8YFLogxK

U2 - 10.1006/jeth.1996.0049

DO - 10.1006/jeth.1996.0049

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AN - SCOPUS:0030118661

SN - 0022-0531

VL - 69

SP - 234

EP - 239

JO - Journal of Economic Theory

JF - Journal of Economic Theory

IS - 1

ER -