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Are the Dimensions of Private Information More Multiple than Expected? Information Asymmetries in the Market of Supplementary Private Health Insurance in England

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  • Karlsson, Martin
  • Klohn, Florian
  • Rickayzen, Ben

Abstract

Our study reexamines standard econometric approaches for the detection of information asymmetries on insurance markets. We claim that evidence based on a standard framework with 2 equations, which uses potential sources of information asymmetries, should stress the importance of heterogeneity in the parameters. We argue that conclusions derived from this methodology can be misleading if the estimated coefficients in such an `unused characteristics' framework are driven by different parts of the population. We show formally that an individual's expected risk from the perspective of insurance, conditioned on certain characteristics (which are not used for calculating the risk premium), can equal the population's expectation in risk - although such characteristics are both related to risk and insurance probability, which is usually interpreted as an indicator of information asymmetries. We provide empirical evidence on the existence of information asymmetries in the market for supplementary private health insurance in the UK. Overall, we found evidence for advantageous selection into the private risk pool; ie people with lower health risk tend to insure more. The main drivers of this phenomenon seem to be characteristics such as income and wealth. Nevertheless, we also found parameter heterogeneity to be relevant, leading to possible misinterpretation if the standard `unused characteristics' approach is applied.

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Bibliographic Info

Paper provided by Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute of Economics (VWL) in its series Darmstadt Discussion Papers in Economics with number 57826.

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Date of creation: 16 Apr 2012
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Publication status: Published in Darmstadt Discussion Papers in Economics . 213 (2012-04-16)
Handle: RePEc:dar:ddpeco:57826

Note: for complete metadata visit http://tubiblio.ulb.tu-darmstadt.de/57826/
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Keywords: Information Asymmetries; Insurance markets; Applied Econometrics;

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References

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  1. Denise Doiron & Glenn Jones & Elizabeth Savage, 2008. "Healthy, wealthy and insured? The role of self-assessed health in the demand for private health insurance," Health Economics, John Wiley & Sons, Ltd., vol. 17(3), pages 317-334.
  2. Kristian Bolin & Daniel Hedblom & Anna Lindgren & Bjorn Lindgren, 2010. "Asymmetric Information and the Demand for Voluntary Health Insurance in Europe," NBER Working Papers 15689, National Bureau of Economic Research, Inc.
  3. Alma Cohen & Peter Siegelman, 2010. "Testing for Adverse Selection in Insurance Markets," Journal of Risk & Insurance, The American Risk and Insurance Association, The American Risk and Insurance Association, vol. 77(1), pages 39-84.
  4. Chiappori, Pierre-Andre & Salanie, Bernard, 1997. "Empirical contract theory: The case of insurance data," European Economic Review, Elsevier, Elsevier, vol. 41(3-5), pages 943-950, April.
  5. Dardanoni, V & Li Donni, P, 2008. "Testing For Asymmetric Information In Insurance Markets With Unobservable Types," Health, Econometrics and Data Group (HEDG) Working Papers, HEDG, c/o Department of Economics, University of York 08/26, HEDG, c/o Department of Economics, University of York.
  6. David M. Cutler & Amy Finkelstein & Kathleen McGarry, 2008. "Preference Heterogeneity and Insurance Markets: Explaining a Puzzle of Insurance," American Economic Review, American Economic Association, American Economic Association, vol. 98(2), pages 157-62, May.
  7. Cutler, David & McGarry, Kathleen & Finkelstein, Amy, 2008. "Preference Heterogeneity and Insurance Markets: Explaining a Puzzle of Insurance," Scholarly Articles 2640581, Harvard University Department of Economics.
  8. Ai, Chunrong & Norton, Edward C., 2003. "Interaction terms in logit and probit models," Economics Letters, Elsevier, Elsevier, vol. 80(1), pages 123-129, July.
  9. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 90(4), pages 630-49, November.
  10. Propper, Carol & Rees, Hedley & Green, Katherine, 2001. "The Demand for Private Medical Insurance in the UK: A Cohort Analysis," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 111(471), pages C180-200, May.
  11. Georges Dionne & Christian Gourieroux & Charles Vanasse, 2001. "Testing for Evidence of Adverse Selection in the Automobile Insurance Market: A Comment," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 109(2), pages 444-473, April.
  12. Pau Olivella & Marcos Vera-Hernandez, 2006. "Testing for adverse selection into private medical insurance," IFS Working Papers, Institute for Fiscal Studies W06/02, Institute for Fiscal Studies.
  13. Liran Einav & Amy Finkelstein & Mark R. Cullen, 2010. "Estimating Welfare in Insurance Markets Using Variation in Prices," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 125(3), pages 877-921, August.
  14. Amy Finkelstein & Kathleen McGarry, 2006. "Multiple Dimensions of Private Information: Evidence from the Long-Term Care Insurance Market," American Economic Review, American Economic Association, American Economic Association, vol. 96(4), pages 938-958, September.
  15. Gavin Wallis, 2004. "The Determinants Of Demand For Private Medical Insurance: Evidence From The British Household Panel Survey," Royal Economic Society Annual Conference 2004, Royal Economic Society 84, Royal Economic Society.
  16. Alma Cohen, 2005. "Asymmetric Information and Learning: Evidence from the Automobile Insurance Market," The Review of Economics and Statistics, MIT Press, vol. 87(2), pages 197-207, May.
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