Abstract
Kenneth Arrow, the economist whose 1963 article established the principles of modern health economics, once posed a parable to show the pernicious role that information can play in insurance markets. Suppose there are two islands, each with one farmer on it. The farmers know that a hurricane is coming that will wipe out one of their islands—but they don’t know which one. In that case, the farmers will naturally want to form an insurance arrangement, agreeing in advance that the farmer who gets wiped out will receive help from the farmer who escapes damage.