Insurance markets allow a policyholder to influence her risky allocation of future wealth positions by transferring wealth form the Non-damage case to the damage case. Real insurance arrangements often happen to have self-participation clauses in it. Before the contract is completed the policyholder has to choose between different specifications of the insurance contract and the contract terms change to the disadvantage of the policyholder if the damage occurs. The target of this class is to understand why insurance contracts have these properties. We will use a simple model of an insurance market, on which insurance companies compete for potential customers, to understand that the properties of real insurance contracts that are mentioned above are the reaction of the market to the information advantage that the demand side has over the supply side (e.g. the probability that the damage occurs or how much the policyholder cares to prevent damages).
Chapter 1: Choice under Risk (Expected Utility Theory)
- Chapter 6 in A. Mas-Colell, M. D. Whinston, and J. Green (1995): "Microeconomic Theory"
Chapter 2: Demand for Insurance
- Chapter 2 in Rees, R. und A. Wambach (2008): "The Microeconomics of Insurance"
Chapter 3: Adverse Selection
- Chapter 4 in Rees, R. und A. Wambach (2008): "The Microeconomics of Insurance"
Chapter 4: Moral Hazard
- Chapter 5 in Rees, R. und A. Wambach (2008): "The Microeconomics of Insurance"
Usually, we will work with precise mathematical formalizations of the ideas that we want to think and talk about. In consequence, a solid understanding of basic differential calculus is required. Other previous mathematical knowledge is not required, since every mathematical concept we need will be explained along the way. Though further previous knowledge is helpful as it will allow to focus on the underlying economics and not to get lost in the formal derivations. In Chapter 2 we will use the game theoretic solution concept of the Nash equilibrium. This will be explained in class, therefore previous knowledge regarding game theory is not required. Previous knowledge in econometrics is not necessary.
The references mentioned above are not meant to be mandatory readings but rather as voluntary for those who are interested in gaining additional related insights that go beyond the scope of this lecture.