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The life insurance market: Asymmetric information revisited

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  • He, Daifeng

Abstract

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.

Suggested Citation

  • He, Daifeng, 2009. "The life insurance market: Asymmetric information revisited," Journal of Public Economics, Elsevier, vol. 93(9-10), pages 1090-1097, October.
  • Handle: RePEc:eee:pubeco:v:93:y:2009:i:9-10:p:1090-1097
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    References listed on IDEAS

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    1. 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.
    2. Amy Finkelstein & James Poterba, 2004. "Adverse Selection in Insurance Markets: Policyholder Evidence from the U.K. Annuity Market," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 183-208, February.
    3. 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 157-162, May.
    4. de Meza, David & Webb, David C, 2001. "Advantageous Selection in Insurance Markets," RAND Journal of Economics, The RAND Corporation, pages 249-262.
    5. Hanming Fang & Michael P. Keane & Dan Silverman, 2008. "Sources of Advantageous Selection: Evidence from the Medigap Insurance Market," Journal of Political Economy, University of Chicago Press, vol. 116(2), pages 303-350, April.
    6. 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, pages 408-427.
    7. 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.
    8. Tomas Philipson & John Cawley, 1999. "An Empirical Examination of Information Barriers to Trade in Insurance," American Economic Review, American Economic Association, pages 827-846.
    9. 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.
    10. 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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    Citations

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    Cited by:

    1. Wuppermann, A.C., 2014. "Private information in life insurance, annuity and health insurance markets," Health, Econometrics and Data Group (HEDG) Working Papers 14/15, HEDG, c/o Department of Economics, University of York.
    2. Deryugina, Tatyana, 2012. "Does Selection in Insurance Markets Always Favor Buyers?," MPRA Paper 53583, University Library of Munich, Germany.
    3. repec:eee:pubeco:v:149:y:2017:i:c:p:47-58 is not listed on IDEAS
    4. Li Gan & Feng Huang & Adalbert Mayer, 2011. "A Simple Test of Private Information in the Insurance Markets with Heterogeneous Insurance Demand," NBER Working Papers 16738, National Bureau of Economic Research, Inc.
    5. Tabea Herrmann & Juliane Zenker, 2016. "Risk-type and preference-based selection and stability of funeral insurance associations in Thailand," Courant Research Centre: Poverty, Equity and Growth - Discussion Papers 198, Courant Research Centre PEG.
    6. Hanming Fang & Zenan Wu, 2016. "Multidimensional Private Information, Market Structure and Insurance Markets," NBER Working Papers 22773, National Bureau of Economic Research, Inc.
    7. Nathaniel Hendren, 2013. "Private Information and Insurance Rejections," Econometrica, Econometric Society, vol. 81(5), pages 1713-1762, September.
    8. Sutcliffe, Charles, 2015. "Trading death: The implications of annuity replication for the annuity puzzle, arbitrage, speculation and portfolios," International Review of Financial Analysis, Elsevier, vol. 38(C), pages 163-174.
    9. He, Daifeng, 2011. "Is there dynamic adverse selection in the life insurance market?," Economics Letters, Elsevier, vol. 112(1), pages 113-115, July.
    10. Zenker, Juliane & Herrmann, Tabea, 2016. "Risk-type and preference-based selection and stability of funeral insurance associations in Thailand," Annual Conference 2016 (Augsburg): Demographic Change 145653, Verein für Socialpolitik / German Economic Association.
    11. Xi Wu & Li Gan, 2013. "Multiple Dimensions of Private Information in Life Insurance Markets," NBER Working Papers 19629, National Bureau of Economic Research, Inc.
    12. Attar, Andrea & Mariotti, Thomas & Salanié, François, 2014. "Multiple Contracting in Insurance Markets," TSE Working Papers 14-532, Toulouse School of Economics (TSE), revised Sep 2016.
    13. Wuppermann, Amelie Catherine, 2011. "Empirical Essays in Health and Education Economics," Munich Dissertations in Economics 13187, University of Munich, Department of Economics.
    14. Nathaniel Hendren, 2015. "Knowledge of Future Job Loss and Implications for Unemployment Insurance," NBER Working Papers 21819, National Bureau of Economic Research, Inc.
    15. Spindler, Martin, 2015. "Asymmetric information in (private) accident insurance," Economics Letters, Elsevier, vol. 130(C), pages 85-88.
    16. Harris, Timothy & Yelowitz, Aaron, 2015. "Racial Disparities in Life Insurance Coverage," MPRA Paper 64005, University Library of Munich, Germany.
    17. Persson, Petra, 2015. "Social insurance and the marriage market," Working Paper Series 2015:6, IFAU - Institute for Evaluation of Labour Market and Education Policy.
    18. Tomas J. Philipson & George Zanjani, 2013. "Economic Analysis of Risk and Uncertainty induced by Health Shocks: A Review and Extension," NBER Working Papers 19005, National Bureau of Economic Research, Inc.
    19. Harris, Timothy & Yelowitz, Aaron, 2015. "Nudging Life Insurance Holdings in the Workplace," MPRA Paper 67150, University Library of Munich, Germany.
    20. Ciprian Matis & Eugenia Matis, 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.
    21. Edward Kung & Hanming Fang, 2011. "Why Do Life Insurance Policyholders Lapse? The Roles of Income, Health and Bequest Motive Shocks," 2011 Meeting Papers 188, Society for Economic Dynamics.
    22. repec:bla:ecinqu:v:55:y:2017:i:2:p:951-981 is not listed on IDEAS
    23. repec:aea:aecrev:v:107:y:2017:i:7:p:1778-1823 is not listed on IDEAS
    24. Harris, Timothy & Yelowitz, Aaron, 2014. "Is there adverse selection in the life insurance market? Evidence from a representative sample of purchasers," Economics Letters, Elsevier, vol. 124(3), pages 520-522.
    25. repec:eee:jhecon:v:55:y:2017:i:c:p:95-107 is not listed on IDEAS

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