Economics

An insurer can get you to reveal your own risk level without ever asking

Michael Rothschild and Joseph Stiglitz showed that when an insurance company can't tell risky customers from safe ones directly, it can offer a menu of contracts, a cheap policy with a high deductible and an expensive one with full coverage, that gets customers to sort themselves: risk-averse high-risk people take full coverage, confident low-risk people accept the deductible to save money. The company never asks your risk level; your own choice reveals it.

Michael Rothschild, Joseph Stiglitz, Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information — Quarterly Journal of Economics, 1976

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