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Multiple Dimensions of Private Information: Evidence from the Long-Term Care Insurance Market

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  • Amy Finkelstein
  • Kathleen McGarry
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    Abstract

    We demonstrate the existence of multiple dimensions of private information in the long-term care insurance market. Two types of people purchase insurance: individuals with private information that they are high risk and individuals with private information that they have strong taste for insurance. Ex post, the former are higher risk than insurance companies expect, while the latter are lower risk. In aggregate, those with more insurance are not higher risk. Our results demonstrate that insurance markets may suffer from asymmetric information even absent a positive correlation between insurance coverage and risk occurrence. The results also suggest a general test for asymmetric information. (JEL D82, G22, I11)

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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.96.4.938
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    Bibliographic Info

    Article provided by American Economic Association in its journal American Economic Review.

    Volume (Year): 96 (2006)
    Issue (Month): 4 (September)
    Pages: 938-958

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    Handle: RePEc:aea:aecrev:v:96:y:2006:i:4:p:938-958

    Note: DOI: 10.1257/aer.96.4.938
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    1. Daniel S. Hamermesh, 1982. "Expectations, Life Expectancy, and Economic Behavior," NBER Working Papers 0835, National Bureau of Economic Research, Inc.
    2. David B. Hertz, 1972. "Discussion," Management Science, INFORMS, vol. 19(4-Part-2), pages P35-P36, December.
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    6. Amy Finkelstein & Kathleen McGarry, 2003. "Private Information and its Effect on Market Equilibrium: New Evidence from Long-Term Care Insurance," NBER Working Papers 9957, National Bureau of Economic Research, Inc.
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    22. Jullien, Bruno & Salanié, Bernard & Salanié, François, 2001. "Screening Risk Averse Agents Under Moral Hazard," CEPR Discussion Papers 3076, C.E.P.R. Discussion Papers.
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