Inverse Selection

Brunnermeier, Markus K.; Lamba, Rohit; Segura-Rodriguez, Carlos

doi:10.1257/aeri.20250418

Abstract

Big data and AI invert classical adverse selection: insurers can now infer statistical correlations that consumers cannot, overturning the traditional informational advantage. We study insurance contracting where a two-dimensional state determines risk, the agent privately knows one dimension, and the insurer privately knows how the two correlate. The insurer faces a trade-off between obfuscation and price discrimination: Fine-tuned contracts enable better screening but may reveal her statistical advantage. The optimal policy exhibits a bang-bang structure: pooling on a statistical model that renders the agent鈥檚 information worthless, and full disclosure elsewhere. Profits increase substantially when agents fail to perform Bayesian inference.

蝌蚪网

蝌蚪网 Review: Insights