Question

Compare the insurance contract offered to the robust in the asymmetric information separating equilibrium with the one offered in a symmetric information setup. Do you see differences in what is offered? Why?

Answer 1

The implication of asymmetric information is seen in the market for insurance . It is noticed that the people over age 65 found difficulty in buying medical insurance because older people do have a much higher risk of serious illness .

The people who buy insurance know much more about their general healthnthan insurance company ,unless it is insisted for medical examination. In such situation there is a tendency that unhealthy people more likely to want insurance thus the proportion of unhealthy people in the pool of insured people increases.This result in increase in price of insurance and the proportion of helathy people in the pool of insured people will be low.

Thus as the process continues until most of the people who want to be insured will be unhealthy people.Thus insurance becomes very expensive and the companies may stop selling insurance

This explains the contract offered to the robust in the asymmetric information seperating equlibrium with the one offered in a symmetric set up. The one who offers symmetric information on his health through any medical examination can help the insurance company to incorporate them in the market thus the price will be reduced to reach equlibrium.

Other wise due to assymetric information the unhealthy people will get insured and company faces high risk. So the prices of insurances will increase. There will be differences in insurance offered and it is because of the asymmetric iformation.

Inorder to avoid this the solution that can be implemented is pooling risk . the government can provide insurance to age above 65 so that risk are spread and reduces the price hike.