Competitive insurance market in the presence of ambiguity

Within the context of a competitive insurance market, this paper examines the impact of ambiguity on the behavior of buyers and sellers. Ambiguity is described through a probability measure on an extended state space that includes extra ambiguous states. It is shown that if insurers face the same or less ambiguity than their customers, a unique equilibrium exists where customers are fully insured. On the other hand, if insurers face more ambiguity than their customers, customers will be under insured and it is even possible that customers may not purchase any insurance