COMPLETE VERSUS INCOMPLETE INSURANCE CONTRACTS UNDER ADVERSE SELECTION WITH MULTIPLE RISKS

This article extends the standard adverse-selection model for competit ive insurance markets, which assumes a single source of risk, to the c ase where individuals are subject to multiple risks. We compare the fo llowing market situations-the case where insurers can offer comprehens ive policies against all sources or risks (complete contracts) and the case where different risks are covered by separate policies (incomple te contracts). In the latter case, we consider whether the insurer of a particular risk has perfect information regarding an individual's co verage against other sources of risks. The analysis emphasizes the inf ormational role of bundling in multidimensional screening. When the ma rket situation allows bundling, it is shown that in equilibrium the lo w-risk type with respect to a particular source of risk does not neces sarily obtain partial coverage against that particular risk.