Paper #461

Títol:

Full insurance, asymmetric information and genetic testing

Autor:

José Penalva

Data:

Novembre 2000

Resum:

This paper extends previous resuls on optimal insurance trading in the presence of a stock market that allows continuous asset trading and substantial personal heterogeneity, and applies those results in a context of asymmetric information with references to the role of genetic testing in insurance markets. We find a novel and surprising result under symmetric information: agents may optimally prefer to purchase full insurance despite the presence of unfairly priced insurance contracts, and other assets which are correlated with insurance. Asymmetric information has a Hirschleifer-type effect which can be solved by suspending insurance trading. Nevertheless, agents can attain their first best allocations, which suggests that the practice of restricting insurance not to be contingent on genetic tests can be efficient.

Paraules clau:

Insurance, asymmetric information, genetic testing, portfolio choice

Codis JEL:

D81, D82, G11, G22

Àrea de Recerca:

Finances i Comptabilitat

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