Wednesday, October 19, 2016
Excel Homework Due October 26 at 11 PM
This one you should find interesting. It is on insurance under private information. A person could be a low risk (low probability of loss) or a high risk (high probability of loss) but there are no distinguishing features that lets the insurance company know which type an individual is. The individuals know which type they are, but if low risk types get better rates then both types have incentive to claim they are low risk. The market must somehow address this incentive problem.
Note: In years past students have had a hard time understanding when a pooling equilibrium will occur and when a separating equilibrium will prevail instead. I plan to cover that in class after the homework is due.