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A simple test for private information in insurance markets with heterogeneous insurance demand

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  • Gan, Li
  • Huang, Feng
  • Mayer, Adalbert

Abstract

A positive correlation between insurance coverage and ex post risk indicates private information in insurance markets. However, this test fails if agents have heterogeneous risk attitudes. We propose a finite mixture model that conditions on unobserved types who differ in their risks preferences and detects asymmetric information even if heterogeneous risk attitudes exist. Our method identifies the existence of private information, without using direct evidence of private information.

Suggested Citation

  • Gan, Li & Huang, Feng & Mayer, Adalbert, 2015. "A simple test for private information in insurance markets with heterogeneous insurance demand," Economics Letters, Elsevier, vol. 136(C), pages 197-200.
    • Handle: RePEc:eee:ecolet:v:136:y:2015:i:c:p:197-200
    DOI: 10.1016/j.econlet.2015.09.039
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    Cited by:

    1. Li Gan & Manuel A. Hernandez & Yanyan Liu, 2018. "Group Lending With Heterogeneous Types," Economic Inquiry, Western Economic Association International, vol. 56(2), pages 895-913, April.
    2. Spindler, Martin, 2013. "“They do know what they are doing... at least most of them.†Asymmetric Information in the (private) Disability Insurance," MEA discussion paper series 201209, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    3. Lambregts, Timo R. & Schut, Frederik T., 2020. "Displaced, disliked and misunderstood: A systematic review of the reasons for low uptake of long-term care insurance and life annuities," The Journal of the Economics of Ageing, Elsevier, vol. 17(C).
    4. Ciprian MatiÅŸ & Eugenia MatiÅŸ, 2013. "Asymmetric Information In Insurance Field: Some General Considerations," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 1(15), pages 1-17.
    5. repec:mea:meawpa:12260 is not listed on IDEAS
    6. Gan, Li & Hernandez, Manuel A. & Zhang, Shuoxun, 2021. "Insurance or deliberate use of the bankruptcy law for financial gain? Testing for heterogeneous filing behaviors in the United States," Economic Modelling, Elsevier, vol. 105(C).
    7. Escobari, Diego & Serrano, Alejandro, 2015. "Reducing Asymmetric Information in Venture Capital Backed IPOs," MPRA Paper 68140, University Library of Munich, Germany.
    8. Spindler, M., 2014. "“They do know what they are doing ... at least most of them.†Asymmetric Information in the (private) Disability Insurance," Health, Econometrics and Data Group (HEDG) Working Papers 14/16, HEDG, c/o Department of Economics, University of York.
    9. Diego Escobari & Manuel A. Hernandez, 2019. "Separating Between Unobserved Consumer Types: Evidence From Airlines," Economic Inquiry, Western Economic Association International, vol. 57(2), pages 1215-1230, April.

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    More about this item

    Keywords

    Individual heterogeneity; Private information; Insurance markets;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets

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