If a pooling equilibrium exists in an insurance market, no separating equilibrium can exist.

Question

Quizplus · Accepted Answer

This statement is true. In a pooling equilibrium, all types of individuals purchase the same insurance coverage and pay the same premium, regardless of their risk level. In contrast, in a separating equilibrium, different types of individuals purchase different insurance coverage and pay different premiums based on their risk level. If a pooling equilibrium exists, it means that there is no incentive for any individual to separate from the pool and purchase a different insurance coverage. Therefore, a separating equilibrium cannot exist in such a market.

If a Pooling Equilibrium Exists in an Insurance Market, No