Endogenous Information and Self-Insurance in Insurance Markets : a Welfare Analysis

We develop a model where consumers do not have ex-ante private information on their risk but can decide to acquire such information before insurance policy purchase. Adverse selection can arise endogenouslyin the insurance market. We focus on the case where information has decision-making value: information allows consumers to optimally choose a self-insurance action. We analyze insurance market response to endogenous information and consumers'incentive to search for such information. Welfare costs caused by the lack of coverage against the risk to be a high risk are analyzed. The case of genetic testing serves as an illustration.