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An Empirical Examination of Information Barriers to Trade inInsurance

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  • John Cawley
  • Tomas Philipson

Abstract

This paper uses direct evidence to evaluate whether asymmetric information is a barrier to trade in the largest market for private insurance in the world: life insurance. We report several findings that seem difficult to reconcile with the conventional theory of insurance under asymmetric information. We conjecture that sellers may know their costs of production better than consumers in this market, as in those for most other products.

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Bibliographic Info

Paper provided by Chicago - Center for Study of Economy and State in its series University of Chicago - George G. Stigler Center for Study of Economy and State with number 132.

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Date of creation: 1997
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Handle: RePEc:fth:chices:132

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References

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  1. Hamermesh, Daniel S, 1985. "Expectations, Life Expectancy, and Economic Behavior," The Quarterly Journal of Economics, MIT Press, vol. 100(2), pages 389-408, May.
  2. Benjamin M. Friedman & Mark Warshawsky, 1985. "The Cost of Annuities: Implications for Saving Behavior and Bequests," NBER Working Papers 1682, National Bureau of Economic Research, Inc.
  3. Townsend, Robert M, 1995. "Financial Systems in Northern Thai Villages," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 1011-46, November.
  4. Gerald S. Goldstein & Mark V. Pauly, 1976. "Group Health Insurance as a Local Public Good," NBER Chapters, in: The Role of Health Insurance in the Health Services Sector, pages 73-114 National Bureau of Economic Research, Inc.
  5. Russell Cooper, 1984. "On Allocative Distortions in Problems of Self-Selection," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 568-577, Winter.
  6. Bond, Eric W & Crocker, Keith J, 1991. "Smoking, Skydiving, and Knitting: The Endogenous Categorization of Risks in Insurance Markets with Asymmetric Information," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 177-200, February.
  7. Bond, Eric W, 1982. "A Direct Test of the "Lemons" Model: The Market for Used Pickup Trucks," American Economic Review, American Economic Association, vol. 72(4), pages 836-40, September.
  8. Michael D. Hurd & Kathleen McGarry, 1993. "Evaluation of Subjective Probability Distributions in the HRS," NBER Working Papers 4560, National Bureau of Economic Research, Inc.
  9. Marc Nerlove, 1981. "Expectations, Plans and Realizations: In Theory and Practice," Discussion Papers 511, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. 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, vol. 90(4), pages 630-49, November.
  11. Carlson, John A & Parkin, J Michael, 1975. "Inflation Expectations," Economica, London School of Economics and Political Science, vol. 42(166), pages 123-38, May.
  12. Genesove, David, 1993. "Adverse Selection in the Wholesale Used Car Market," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 644-65, August.
  13. John Cawley & Tomas Philipson, 1996. "An Empirical Examination of Information Barriers to Trade in Insurance," NBER Working Papers 5669, National Bureau of Economic Research, Inc.
  14. Foster, Andrew D & Rosenzweig, Mark R, 1994. "A Test for Moral Hazard in the Labor Market: Contractual Arrangements, Effort, and Health," The Review of Economics and Statistics, MIT Press, vol. 76(2), pages 213-27, May.
  15. Riley, John G, 1979. "Informational Equilibrium," Econometrica, Econometric Society, vol. 47(2), pages 331-59, March.
  16. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
  17. Mailath, George J, 1987. "Incentive Compatibility in Signaling Games with a Continuum of Types," Econometrica, Econometric Society, vol. 55(6), pages 1349-65, November.
  18. Tomas J. Philipson & Gary S. Becker, 1998. "Old-Age Longevity and Mortality-Contingent Claims," Journal of Political Economy, University of Chicago Press, vol. 106(3), pages 551-573, June.
  19. Spence, Michael, 1978. "Product differentiation and performance in insurance markets," Journal of Public Economics, Elsevier, vol. 10(3), pages 427-447, December.
  20. Townsend, Robert M., 1988. "Information constrained insurance : The revelation principle extended," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 411-450.
  21. Russell Cooper, 1983. "On Allocative Distortions in Problems of Self-Selection," Cowles Foundation Discussion Papers 647R, Cowles Foundation for Research in Economics, Yale University.
  22. Friedman, Benjamin M & Warshawsky, Mark J, 1990. "The Cost of Annuities: Implications for Saving Behavior and Bequests," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 135-54, February.
  23. Viscusi, W Kip, 1990. "Do Smokers Underestimate Risks?," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1253-69, December.
  24. Puelz, Robert & Snow, Arthur, 1994. "Evidence on Adverse Selection: Equilibrium Signaling and Cross-Subsidization in the Insurance Market," Journal of Political Economy, University of Chicago Press, vol. 102(2), pages 236-57, April.
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