Advantageous selection in insurance markets

This article reverses the standard conclusion that asymmetric information p lus competition results in insufficient insurance provision. Risk-tolerant individuals take few precautions and are disinclined to insure, but they ar e drawn into a pooling equilibrium by the low premiums created by the prese nce of safer more risk-averse types. Taxing insurance drives out the reckle ss clients, allowing a strict Pareto gain. This result depends on administr ative costs in processing claims and issuing policies, as does the novel fi nding of a pure-strategy, partial-pooling, subgame-perfect Nash equilibrium in the insurance market.