This paper asks how private misperceptions about individual risk affect equilibrium insurance contracts, pooling, and welfare when contracts adjust endogenously. The author pairs a general equilibrium model and estimation algorithm with evidence from survey and market data to trace how the joint distribution of actual risk and misperception matters for contract outcomes. The contribution is a modeling and estimation approach intended to recover equilibrium contracts, pooling behavior, and welfare effects in settings where agents misperceive their own risk.
General equilibrium model and estimation algorithm Empirical application using HRS data Assessing welfare impacts of misperception
Data and methods
The paper develops a general model and an algorithm to estimate equilibrium contracts, pooling, and welfare consequences when private information is imperfectly perceived and contracts respond endogenously. The abstract reports an empirical application using the Health and Retirement Study (HRS) and a suggestive application to U.S. annuity markets. The methods link a structural economic model to observed joint variation in risk and misperception to infer equilibrium contract distortions.
Main findings
Using HRS data the author reports that misperceptions covary with risk type: "high types underperceive their risk and low types overperceive." The abstract further offers suggestive evidence from U.S. annuity markets that contracts appear distorted by misperceptions and that welfare would likely increase if those distortions were corrected. Key reported results are:
- Misperception correlates with multiple risk dimensions (medical, long-term care, disability, mortality).
- Model-based estimates imply contract distortions in annuity markets and potential welfare gains.
