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Dynamic Inefficiencies in Insurance Markets: Evidence from Long-Term Care Insurance

  • Amy Finkelstein
  • Kathleen McGarry
  • Amir Sufi

We examine whether unregulated, private insurance markets efficiently provide insurance against reclassification risk (the risk of becoming a bad risk and facing higher premiums). To do so, we examine the ex-post risk type of individuals who drop their long-term care insurance contracts relative to those who are continually insured. Consistent with dynamic inefficiencies, we find that individuals who drop coverage are of lower risk ex-post than individuals who were otherwise-equivalent at the time of purchase but who do not drop out of their contracts. These findings suggest that dynamic market failures in private insurance markets can preclude the efficient provision of insurance against reclassification risk.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 95 (2005)
Issue (Month): 2 (May)
Pages: 224-228

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Handle: RePEc:aea:aecrev:v:95:y:2005:i:2:p:224-228
Note: DOI: 10.1257/000282805774669808
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  1. 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.
  2. Pauly, Mark V & Kunreuther, Howard & Hirth, Richard, 1995. "Guaranteed Renewability in Insurance," Journal of Risk and Uncertainty, Springer, vol. 10(2), pages 143-56, March.
  3. Hirshleifer, Jack, 1971. "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review, American Economic Association, vol. 61(4), pages 561-74, September.
  4. Cochrane, John H, 1995. "Time-Consistent Health Insurance," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 445-73, June.
  5. repec:oup:qjecon:v:118:y:2003:i:1:p:299-327 is not listed on IDEAS
  6. Norton, Edward C., 2000. "Long-term care," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 17, pages 955-994 Elsevier.
  7. Amy Finkelstein & Kathleen McGarry & Amir Sufi, 2005. "Dynamic Inefficiencies in Insurance Markets: Evidence from Long-Term Care Insurance," American Economic Review, American Economic Association, vol. 95(2), pages 224-228, May.
  8. Amy Finkelstein & Kathleen McGarry, 2003. "Private Information and its Effect on Market Equilibrium: New Evidence from Long-Term Care Insurance," NBER Working Papers 9957, National Bureau of Economic Research, Inc.
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