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False diagnoses: pitfalls of testing for asymmetric information in insurance markets

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  • de Meza, David
  • Webb, David C.

Abstract

The widely applied ‘positive correlation test’ concludes that there is symmetric information in an insurance market if observationally identical buyers of high and low cover contracts have the same loss rate. As standard assumptions imply that only full‐cover contracts are bought when information is symmetric, a contradiction arises. The existence of a variety of contracts can be reconciled with symmetric information by claim‐processing costs but existing tests are then shown to fail. Ignoring the nature of loading factors may also cause recent studies to mismeasure the welfare costs of asymmetric information but these errors can be rectified.

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  • de Meza, David & Webb, David C., 2017. "False diagnoses: pitfalls of testing for asymmetric information in insurance markets," LSE Research Online Documents on Economics 65744, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:65744
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    File URL: http://eprints.lse.ac.uk/65744/
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    References listed on IDEAS

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    Cited by:

    1. Daniel Bauer & Jochen Russ & Nan Zhu, 2020. "Asymmetric information in secondary insurance markets: Evidence from the life settlements market," Quantitative Economics, Econometric Society, vol. 11(3), pages 1143-1175, July.
    2. De La Mata, Dolores & Machado, Matilde P. & Olivella, Pau & Valdés, Maria Nieves, 2022. "Asymmetric Information with multiple risks: the case of the Chilean Private Health Insurance Market," UC3M Working papers. Economics 35441, Universidad Carlos III de Madrid. Departamento de Economía.
    3. Jan Michael Bauer & Jörg Schiller & Christopher Schreckenberger, 2020. "Heterogeneous selection in the market for private supplemental dental insurance: evidence from Germany," Empirical Economics, Springer, vol. 59(1), pages 205-231, July.
    4. de Meza, David & Reito, Francesco & Reyniers, Diane, 2021. "Too much trade: A problem of adverse selection," MPRA Paper 107084, University Library of Munich, Germany.
    5. de Meza, David & Reito, Francesco & Reyniers, Diane, 2021. "Too much trade: The hidden problem of adverse selection," Journal of Public Economics, Elsevier, vol. 204(C).
    6. de Meza, David & Reito, Francesco, 2019. "Too Little Lending: A Problem of Symmetric Information," MPRA Paper 93700, University Library of Munich, Germany.

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    More about this item

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance

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