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The life insurance market: Asymmetric information revisited

  • He, Daifeng

This paper finds evidence for the presence of asymmetric information in the life insurance market, a conclusion contrasting with the existing literature. In particular, we find a significant and positive correlation between the decision to purchase life insurance and subsequent mortality, conditional on risk classification. Individuals who died within a 12-year time window after a base year were 19% more likely to have taken up life insurance in that base year than were those who survived the time window. Moreover, as might be expected when individuals have residual private information, we find that the earlier an individual died, the more likely she was to have initially bought insurance. The primary factor driving the difference between our and the prior literature's findings is that we focus on a sample of potential new buyers, rather than on the entire cross section, to address the sample selection problem induced by potential mortality differences between those with and those without coverage.

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File URL: http://www.sciencedirect.com/science/article/B6V76-4WSRDX9-3/2/03054b1b4e9789db56391a3be7ed88ad
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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 93 (2009)
Issue (Month): 9-10 (October)
Pages: 1090-1097

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Handle: RePEc:eee:pubeco:v:93:y:2009:i:9-10:p:1090-1097
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505578

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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. 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.
  3. Hausman, J. A. & Abrevaya, Jason & Scott-Morton, F. M., 1998. "Misclassification of the dependent variable in a discrete-response setting," Journal of Econometrics, Elsevier, vol. 87(2), pages 239-269, September.
  4. 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.
  5. 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.
  6. Igal Hendel & Alessandro Lizzeri, 2000. "The Role of Commitment in Dynamic Contracts: Evidence from Life Insurance," NBER Working Papers 7470, National Bureau of Economic Research, Inc.
  7. 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.
  8. Li Gan & Michael D. Hurd & Daniel L. McFadden, 2005. "Individual Subjective Survival Curves," NBER Chapters, in: Analyses in the Economics of Aging, pages 377-412 National Bureau of Economic Research, Inc.
  9. Pierre‐André Chiappori & Bruno Jullien & Bernard Salanié & François Salanié, 2006. "Asymmetric information in insurance: general testable implications," RAND Journal of Economics, RAND Corporation, vol. 37(4), pages 783-798, December.
  10. John Cawley & Tomas Philipson, 1996. "An Empirical Examination of Information Barriers to Trade in Insurance," NBER Working Papers 5669, National Bureau of Economic Research, Inc.
  11. 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.
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