An experimental investigation of risk sharing and adverse selection

F. Tausch*, J. Potters, A.M. Riedl

*Corresponding author for this work

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Does adverse selection hamper the effectiveness of voluntary risk sharing? How do differences in risk profiles affect adverse selection? We experimentally investigate individuals’ willingness to share risks with others. Across treatments we vary howrisk profiles differ between individuals.We find strong evidence for adverse selection if individuals’ risk profiles can be ranked according to first-order stochastic dominance and only little evidence for adverse selection if risk profiles can only be
ranked according to mean-preserving spreads. We observe the same pattern also for anticipated adverse selection. These results suggest that the degree to which adverse selection erodes voluntary risk sharing arrangements crucially depends on the form of risk heterogeneity.
Original languageEnglish
Pages (from-to)167-186
Number of pages20
JournalJournal of Risk and Uncertainty
Issue number2
Publication statusPublished - Apr 2014


  • Adverse selection
  • Risk sharing
  • Experiments
  • Risk heterogeneity

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