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Private Information and Insurance Rejections

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  • Nathaniel Hendren

Abstract

Across a wide set of non-group insurance markets, applicants are rejected based on observable, often high-risk, characteristics. This paper argues private information, held by the potential applicant pool, explains rejections. I formulate this argument by developing and testing a model in which agents may have private information about their risk. I first derive a new no-trade result that theoretically explains how private information could cause rejections. I then develop a new empirical methodology to test whether this no-trade condition can explain rejections. The methodology uses subjective probability elicitations as noisy measures of agents beliefs. I apply this approach to three non-group markets: long-term care, disability, and life insurance. Consistent with the predictions of the theory, in all three settings I find significant amounts of private information held by those who would be rejected; I find generally more private information for those who would be rejected relative to those who can purchase insurance; and I show it is enough private information to explain a complete absence of trade for those who would be rejected. The results suggest private information prevents the existence of large segments of these three major insurance markets.
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Suggested Citation

  • Nathaniel Hendren, 2013. "Private Information and Insurance Rejections," Econometrica, Econometric Society, vol. 81(5), pages 1713-1762, September.
  • Handle: RePEc:ecm:emetrp:v:81:y:2013:i:5:p:1713-1762
    DOI: ECTA10931
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    File URL: http://hdl.handle.net/10.3982/ECTA10931
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    References listed on IDEAS

    as
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    More about this item

    JEL classification:

    • H0 - Public Economics - - General
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private

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