Self‐Control, Effort Procrastination, and Competitive Equilibrium in Insurance Markets

Abstract

AbstractThis article studies consumers’ self‐control problems in precautionary activities, their contract choices, and the welfare implications in a competitive insurance market. Present bias and consumer naivete both induce consumers to procrastinate or eventually give up precautionary efforts. In consequence, self‐control problems disrupt the monotonicity of consumers’ indifference curve on contract choices, leading to a pooling equilibrium or an absence of risk–coverage correlation, in addition to the classic result of adverse selection. Compulsory insurance raises all consumers’ welfare only in adverse selection, but not in other equilibrium patterns.