Adverse selection with endogenous information in insurance markets

Abstract Models of adverse selection assume that risk type is known to the consumer but not to the insurer. Many analyses suggest that information has zero social value and negative prior value. Why then would consumers become informed? What is the incentive to gather information and why does adverse selection arise? We show that the private value of information is non-negative only if insurers cannot observe consumers' information status, or if consumers can conceal their informational status. We examine the existence and characterization of equilibria under different configurations of information costs and benefits. Finally, we examine some welfare implications of the endogenous information model for public policy regarding genetic testing and for state regulations concerning HIV testing.