Abstract

I analyze long-term contracting in insurance markets with asymmetric information. A buyer privately observes her risk type, which evolves stochastically over time. A long-term contract specifies a menu of policies contingent on the history of coverage choices and contractable accident information. The optimal contract offers in each period a choice between a perpetual complete coverage policy with fixed premium, and a risky continuation contract in which accidents affect within-period consumption (partial coverage) and, potentially, future policies. I allow for restrictions on how accident information can be used in pricing. Without restrictions, accidents and coverage choices are used as signals for the efficient provision of incentives. In the presence of pricing restrictions, low coverage is rewarded, leading to menus with more attractive policies. Allocative inefficiency decreases along all histories. These results are used to study a model of perfect competition, where the equilibrium is unique whenever it exists, and the monopoly problem.

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