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Testing For Asymmetric Information In Insurance Markets With Unobservable Types

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  • Dardanoni, V
  • Li Donni, P

Abstract

In two important recent papers, Finkelstein and McGarry [25] and Finkelstein and Poterba [28] propose a new test for asymmetric information in insurance markets that considers explicitly unobserved heterogeneity in insurance demand. In this paper we propose an alternative implementation of the Finkelstein-McGarry-Poterba test based on the identification of unobservable types by use of finite mixture models. The actual implementation of our test follows some recent advances on marginal modelling as applied to latent class analysis; formal testing procedures for the null of asymmetric information and for the hypothesis that private information is indeed multidimensional can be performed by imposing restrictions on the behavior of these unobservable types. To show the potential applicability of our approach, we look at the long term insurance market as analyzed in Finkelstein and McGarry [25], where we also find strong evidence for both asymmetric information and multidimensional unobserved heterogeneity.

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Bibliographic Info

Paper provided by HEDG, c/o Department of Economics, University of York in its series Health, Econometrics and Data Group (HEDG) Working Papers with number 08/26.

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Date of creation: Oct 2008
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Handle: RePEc:yor:hectdg:08/26

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Postal: HEDG/HERC, Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom
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Web page: http://www.york.ac.uk/economics/postgrad/herc/hedg/
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Keywords: Asymmetric Information; Unobservable Types; Latent Class Analysis; Long Term Insurance Market.;

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References

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  1. Cutler, David & McGarry, Kathleen & Finkelstein, Amy, 2008. "Preference Heterogeneity and Insurance Markets: Explaining a Puzzle of Insurance," Scholarly Articles 2640581, Harvard University Department of Economics.
  2. Amy Finkelstein & James Poterba, 2000. "Adverse Selection in Insurance Markets: Policyholder Evidence from the U.K. Annuity Market," NBER Working Papers 8045, National Bureau of Economic Research, Inc.
  3. 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.
  4. Francesco Bartolucci & Antonio Forcina, 2005. "Likelihood inference on the underlying structure of IRT models," Psychometrika, Springer, vol. 70(1), pages 31-43, March.
  5. 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.
  6. Olivia S. Mitchell & James M. Poterba & Mark J. Warshawsky, . "New Evidence on the Money's Worth of Individual Annuities," Pension Research Council Working Papers 97-9, Wharton School Pension Research Council, University of Pennsylvania.
  7. Cardon, James H & Hendel, Igal, 2001. "Asymmetric Information in Health Insurance: Evidence from the National Medical Expenditure Survey," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 408-27, Autumn.
  8. David M. Cutler & Amy Finkelstein & Kathleen McGarry, 2008. "Preference Heterogeneity and Insurance Markets: Explaining a Puzzle of Insurance," American Economic Review, American Economic Association, vol. 98(2), pages 157-62, May.
  9. Rothenberg, Thomas J, 1971. "Identification in Parametric Models," Econometrica, Econometric Society, vol. 39(3), pages 577-91, May.
  10. 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.
  11. B. Douglas Bernheim & Lorenzo Forni & Jagadeesh Gokhale & Laurence J. Kotlikoff, 2001. "The mismatch between life insurance holdings and financial vulnerabilities: evidence from the Health and Retirement Survey," Working Paper 0109, Federal Reserve Bank of Cleveland.
  12. Tomas Philipson & John Cawley, 1999. "An Empirical Examination of Information Barriers to Trade in Insurance," American Economic Review, American Economic Association, vol. 89(4), pages 827-846, September.
  13. Hurd, Michael D. & McGarry, Kathleen, 1997. "Medical insurance and the use of health care services by the elderly," Journal of Health Economics, Elsevier, vol. 16(2), pages 129-154, April.
  14. Ettner, Susan L., 1997. "Adverse selection and the purchase of Medigap insurance by the elderly," Journal of Health Economics, Elsevier, vol. 16(5), pages 543-562, October.
  15. De Meza, D. & Webb, D.C., 2000. "Advantageous Selection in Insurance Market," Discussion Papers 0007, Exeter University, Department of Economics.
  16. Fang, Hanming & Keane, Michael & Silverman, Dan, 2006. "Sources of Advantageous Selection: Evidence from the Medigap Insurance Market," Working Papers 17, Yale University, Department of Economics.
  17. Jeffrey R. Brown & Amy Finkelstein, 2004. "Supply or Demand: Why is the Market for Long-Term Care Insurance So Small?," NBER Working Papers 10782, National Bureau of Economic Research, Inc.
  18. Pierre-André Chiappori & Bruno Jullien & Bernard Salanié & François Salanié, 2002. "Asymmetric Information in Insurance : General Testable Implications," Working Papers 2002-42, Centre de Recherche en Economie et Statistique.
  19. Forcina, Antonio, 2008. "Identifiability of extended latent class models with individual covariates," Computational Statistics & Data Analysis, Elsevier, vol. 52(12), pages 5263-5268, August.
  20. David McCarthy & Olivia S. Mitchell, 2003. "International Adverse Selection in Life Insurance and Annuities," NBER Working Papers 9975, National Bureau of Economic Research, Inc.
  21. Bartolucci, Francesco & Forcina, Antonio, 2006. "A Class of Latent Marginal Models for CaptureRecapture Data With Continuous Covariates," Journal of the American Statistical Association, American Statistical Association, vol. 101, pages 786-794, June.
  22. Barsky, Robert B, et al, 1997. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Study," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 537-79, May.
  23. Kodde, David A & Palm, Franz C, 1986. "Wald Criteria for Jointly Testing Equality and Inequality Restriction s," Econometrica, Econometric Society, vol. 54(5), pages 1243-48, September.
  24. Amy Finkelstein & Kathleen McGarry, 2006. "Multiple Dimensions of Private Information: Evidence from the Long-Term Care Insurance Market," American Economic Review, American Economic Association, vol. 96(4), pages 938-958, September.
  25. Robert B. Barsky & Miles S. Kimball & F. Thomas Juster & Matthew D. Shapiro, 1997. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Survey," NBER Working Papers 5213, National Bureau of Economic Research, Inc.
  26. Georges Dionne & Christian Gourieroux & Charles Vanasse, 2001. "Testing for Evidence of Adverse Selection in the Automobile Insurance Market: A Comment," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 444-473, April.
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Cited by:
  1. Karlsson, Martin & Klohn, Florian & Rickayzen, Ben, 2012. "Are the Dimensions of Private Information More Multiple than Expected? Information Asymmetries in the Market of Supplementary Private Health Insurance in England," Darmstadt Discussion Papers in Economics 57826, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute of Economics (VWL).

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