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“They do know what they are doing... at least most of them.” Asymmetric Information in the (private) Disability Insurance

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  • Spindler, Martin

    ()
    (Munich Center for the Economics of Aging (MEA))

Abstract

In this paper we analyze asymmetric information in the (private) disability insurance, which has not been analyzed before in the literature, but covers one of the most important risks faced by individuals in modern society, namely the loss of human capital. We show that there is asymmetric information, but the extent depends on the amount of coverage. Moreover, the option of choosing an annual adjustment of the insured sum has strong predictive power both for the occurrence of an accident and the chosen coverage, although it should be irrelevant from the point of theory. This result shows new ways to design contracts and variable selection for risk classification. In contrast to most previous studies, we also explicitly take into consideration unobserved heterogeneity by applying finite mixture models and so called ‘unused’ observables.

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Bibliographic Info

Paper provided by Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy in its series MEA discussion paper series with number 12260.

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Date of creation: 24 May 2013
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Handle: RePEc:mea:meawpa:12260

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  1. Spindler, Martin & Winter, Joachim & Hagmayer, Steffen, 2012. "Asymmetric Information in the Market for Automobile Insurance: Evidence from Germany," MEA discussion paper series 12259, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
  2. de Meza, David & Webb, David C, 2001. "Advantageous Selection in Insurance Markets," RAND Journal of Economics, The RAND Corporation, vol. 32(2), pages 249-62, Summer.
  3. Pierre‐André Chiappori & Bruno Jullien & Bernard Salanié & François Salanié, 2006. "Asymmetric information in insurance: general testable implications," RAND Journal of Economics, RAND Corporation, vol. 37(4), pages 783-798, December.
  4. Li Gan & Feng Huang & Adalbert Mayer, 2011. "A Simple Test of Private Information in the Insurance Markets with Heterogeneous Insurance Demand," NBER Working Papers 16738, National Bureau of Economic Research, Inc.
  5. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
  6. G. Dionne & N. Doherty & N. Fombaron, 2000. "Adverse Selection in Insurance Markets," THEMA Working Papers 2000-21, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  7. Amy Finkelstein & James Poterba, 2006. "Testing for Asymmetric Information Using 'Unused Observables' in Insurance Markets: Evidence from the U.K. Annuity Market," NBER Working Papers 12112, National Bureau of Economic Research, Inc.
  8. Alma Cohen & Peter Siegelman, 2009. "Testing for Adverse Selection in Insurance Markets," NBER Working Papers 15586, National Bureau of Economic Research, Inc.
  9. Shavell, Steven, 1979. "On Moral Hazard and Insurance," The Quarterly Journal of Economics, MIT Press, vol. 93(4), pages 541-62, November.
  10. Liangjun Su & Martin Spindler, 2013. "Nonparametric Testing for Asymmetric Information," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 31(2), pages 208-225, April.
  11. Gourieroux, Christian & Monfort, Alain & Renault, Eric & Trognon, Alain, 1987. "Generalised residuals," Journal of Econometrics, Elsevier, vol. 34(1-2), pages 5-32.
  12. Marc Henry & Yuichi Kitamura & Bernard Salanié, 2010. "Identifying Finite Mixtures in Econometric Models," Discussion Papers 0910-20, Columbia University, Department of Economics.
  13. Bettina Grün & Friedrich Leisch, . "FlexMix Version 2: Finite Mixtures with Concomitant Variables and Varying and Constant Parameters," Journal of Statistical Software, American Statistical Association, vol. 28(i04).
  14. 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.
  15. 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.
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