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Does Selection in Insurance Markets Always Favor Buyers?

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  • Deryugina, Tatyana

Abstract

This paper provides empirical evidence of advantageous selection in insurance markets. By using a novel insurance setting where moral hazard is not a concern, I am able to overcome an important obstacle in most studies of selection: the inability to distinguish moral hazard from selection. In the US market for area yield crop insurance, payouts are based on average county yields. Moreover, area yield insurance is only offered in counties where no farmer is large enough to affect the mean yield. I find that area yield insurance takeup is higher when average yields in the county are higher and show that this effect is not being driven by prices. This suggests that the net selection into these plans thus favors insurance providers, not buyers. One possible mechanism is that providers have better information about aggregate yields. Another is that the desirability of other, non-area yield, insurance options changes, a potentially important but previously overlooked driver of selection.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 53583.

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Date of creation: 06 May 2012
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Handle: RePEc:pra:mprapa:53583

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Keywords: Insurance; Selection; Crop Insurance;

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References

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  1. 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.
  2. He, Daifeng, 2009. "The life insurance market: Asymmetric information revisited," Journal of Public Economics, Elsevier, Elsevier, vol. 93(9-10), pages 1090-1097, October.
  3. 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.
  4. John Cawley & Tomas Philipson, 1997. "An Empirical Examination of Information Barriers to Trade inInsurance," University of Chicago - George G. Stigler Center for Study of Economy and State, Chicago - Center for Study of Economy and State 132, Chicago - Center for Study of Economy and State.
  5. Grabowski, David C. & Gruber, Jonathan, 2007. "Moral hazard in nursing home use," Journal of Health Economics, Elsevier, Elsevier, vol. 26(3), pages 560-577, May.
  6. Jerry R. Skees & J. Roy Black & Barry J. Barnett, 1997. "Designing and Rating an Area Yield Crop Insurance Contract," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 79(2), pages 430-438.
  7. Liran Einav & Amy Finkelstein & Stephen Ryan & Paul Schrimpf & Mark Cullen, 2011. "Selection on Moral Hazard in Health Insurance," Discussion Papers, Stanford Institute for Economic Policy Research 10-027, Stanford Institute for Economic Policy Research.
  8. Villeneuve, Bertrand, 2005. "Competition between insurers with superior information," European Economic Review, Elsevier, Elsevier, vol. 49(2), pages 321-340, February.
  9. Bertrand Villeneuve, 2000. "The Consequences for a Monopolistic Insurance Firm of Evaluating Risk Better than Customers: The Adverse Selection Hypothesis Reversed," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 25(1), pages 65-79, June.
  10. Amy Finkelstein & James Poterba, 2004. "Adverse Selection in Insurance Markets: Policyholder Evidence from the U.K. Annuity Market," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 112(1), pages 183-208, February.
  11. Ker, Alan P. & McGowan, Pat, 2000. "Weather-Based Adverse Selection And The U.S. Crop Insurance Program: The Private Insurance Company Perspective," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, Western Agricultural Economics Association, vol. 25(02), December.
  12. Olivier Desch�nes & Michael Greenstone, 2007. "The Economic Impacts of Climate Change: Evidence from Agricultural Output and Random Fluctuations in Weather," American Economic Review, American Economic Association, American Economic Association, vol. 97(1), pages 354-385, March.
  13. Fang, Hanming & Keane, Michael & Silverman, Dan, 2006. "Sources of Advantageous Selection: Evidence from the Medigap Insurance Market," Working Papers, Yale University, Department of Economics 17, Yale University, Department of Economics.
  14. Vincent H. Smith & Barry K. Goodwin, 1996. "Crop Insurance, Moral Hazard, and Agricultural Chemical Use," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 78(2), pages 428-438.
  15. 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.
  16. Jeffrey R. Brown & Amy Finkelstein, 2007. "Why is the market for long-term care insurance so small?," NBER Chapters, in: Trans-Atlantic Public Economics Seminar (TAPES), Public Policy and Retirement, pages 1967-1991 National Bureau of Economic Research, Inc.
  17. Amy Finkelstein & James Poterba, 2002. "Selection Effects in the United Kingdom Individual Annuities Market," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 112(476), pages 28-50, January.
  18. David M. Cutler & Sarah Reber, 1996. "Paying for Health Insurance: The Tradeoff between Competition and Adverse Selection," NBER Working Papers 5796, National Bureau of Economic Research, Inc.
  19. Philippe Donder & Jean Hindriks, 2009. "Adverse selection, moral hazard and propitious selection," Journal of Risk and Uncertainty, Springer, Springer, vol. 38(1), pages 73-86, February.
  20. Keith H. Coble & Thomas O. Knight & Rulon D. Pope & Jeffery R. Williams, 1997. "An Expected-Indemnity Approach to the Measurement of Moral Hazard in Crop Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 79(1), pages 216-226.
  21. S. Hun Seog, 2009. "Insurance Markets With Differential Information," Journal of Risk & Insurance, The American Risk and Insurance Association, The American Risk and Insurance Association, vol. 76(2), pages 279-294.
  22. 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.
  23. Sumit Agarwal & Souphala Chomsisengphet & Chunlin Liu, 2010. "The Importance of Adverse Selection in the Credit Card Market: Evidence from Randomized Trials of Credit Card Solicitations," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 42(4), pages 743-754, 06.
  24. Sloan, Frank A & Norton, Edward C, 1997. "Adverse Selection, Bequests, Crowding Out, and Private Demand for Insurance: Evidence from the Long-Term Care Insurance Market," Journal of Risk and Uncertainty, Springer, Springer, vol. 15(3), pages 201-19, December.
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