Abstract
It has been established that categorical discrimination based on observable characteristics such as gender, age, or ethnicity enhances efficiency. We consider a different form of risk classification when there exists a costless yet imperfectly informative test of risk type, with the test outcome unknown to the agents ex ante. We show that a voluntary risk classification in which agents are given the option to take the test always increases efficiency compared with no risk classification. Moreover, voluntary risk classification also Pareto dominates a regime of compulsory risk classification in which all agents are required to take the test.
Original language | English (US) |
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Journal | Journal of Risk and Insurance |
DOIs | |
State | Accepted/In press - 2020 |
All Science Journal Classification (ASJC) codes
- Accounting
- Finance
- Economics and Econometrics