Economics Working Papers

Publication Date

2-4-2020

Number

20002

Abstract

In insurance industry, product disclosure statements (PDSs) consist of descriptions of uncertain contingencies by the insurance plans (e.g., “hospital coverage”, “dental coverage”, etc.) and are often very different. In this paper, we model PDSs as information partitions of the state space, which can influence how a consumer perceives the structure of her choice problem and hence her deductible choices. We study a model of an insurance company that aims to promote profit by designing the framing of its PDS. We compare the company’s profits under two PDSs, one of which is coarser than the other. Our main results show that under simple conditions, the PDS consisting of finer partitions of the more expensive states is more profitable.

JEL Classification

D11, D86, D91

Version History

Original Release Date: February 4, 2020

Departments

Department of Economics, Iowa State University

File Format

application/pdf

Length

62 pages

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