Essays on private information and choice

I provide new evidence on the existence and nature of imperfect information in health insurance markets. Empirical research has traditionally concentrated on testing for positive correlation between coverage and risk predicted by standard moral hazard and adverse selection models. Recent theoretical advances demonstrate that the lack of such correlation is consistent with more complex models with unobserved risk-aversion. I test for selection on more than one type of latent information by specifying a hybrid endogenous treatment model and estimating it using Markov Chain Monte Carlo methods. I use data from the 2000 Medical Expenditure Panel Survey, which contains a set of attitudinal variables necessary to estimate the model. Although the overall selection effect appears to be insignificant, the results indicate that individuals possess private information which increases their propensity to be insured and to utilize health care. This suggests that lack of conditional correlation between insurance coverage and health care utilization results from informational asymmetries of multiple types inducing selection in opposite directions. I examine the relationship between capital structure and performance of business start ups in the presence of imperfect information. Economic theory identifies two potential effects caused by imperfect information that determine the relationship between capital structure and performance. First, capital structure may affect performance because of moral hazard (incentive effect). For example, outside equity dilutes ownership and thus decreases an entrepreneur's incentives to exert effort. Second, firms may self select into certain capital structures based on private information about their future expected success (selection effect). For example, they may choose higher leverage based on favorable future prospects to avoid sharing the returns with outside equity holders. I investigate which effect dominates by specifying an econometric model to jointly estimate capital structure and performance of business start-ups. I use a data set collected by the National Federation of Independent Business Foundation. The results suggest that debt does not have significant incentive or selection effects. In contrast, both selection and incentive effects are present in the case of outside equity indicating that outside investors are able to both overcome informational opaqueness of business start-ups and provide better incentives for performance.