The Efficiency of Voluntary Risk Classification in Insurance Markets
نویسندگان
چکیده
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 where there exists some costless yet imperfectly informative test on risk types, with the test outcome unknown to the agents ex-ante. We show that a voluntary risk classification where agents are given the option to take the test always increases efficiency compared with no risk classification. Moreover, voluntary risk classification also Pareto dominates the regime of compulsory risk classification in which all agents are required to take the test. ∗Corresponding author. Phone: +1-(814)-863-8666; Fax: +1-(814)-865-6284. EFFICIENCY OF VOLUNTARY RISK CLASSIFICATION 1
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