An experimental investigation of risk sharing and adverse selection

F. Tausch, J.J.M. Potters, A. Riedl

Research output: Contribution to journalArticleScientificpeer-review

Abstract

Does adverse selection hamper the effectiveness of voluntary risk sharing? How do differences in risk profiles affect adverse selection? We experimentally investigate individuals’ willingness to share risks with others. Across treatments we vary how risk profiles differ between individuals. We find strong evidence for adverse selection if individuals’ risk profiles can be ranked according to first-order stochastic dominance and only little evidence for adverse selection if risk profiles can only be ranked according to mean-preserving spreads. We observe the same pattern also for anticipated adverse selection. These results suggest that the degree to which adverse selection erodes voluntary risk sharing arrangements crucially depends on the form of risk heterogeneity.
Original languageEnglish
Pages (from-to)167-186
JournalJournal of Risk and Uncertainty
Volume48
Issue number2
DOIs
Publication statusPublished - Apr 2014

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Adverse selection
Risk sharing
Mean preserving spread
Willingness
Individual risk
Stochastic dominance

Keywords

  • adverse selection
  • risk sharing
  • experiments
  • risk heterogeneity

Cite this

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An experimental investigation of risk sharing and adverse selection. / Tausch, F.; Potters, J.J.M.; Riedl, A.

In: Journal of Risk and Uncertainty, Vol. 48, No. 2, 04.2014, p. 167-186.

Research output: Contribution to journalArticleScientificpeer-review

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