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Prices Matter: Comparing Two Tests of Adverse Selection in Health Insurance

Author

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  • Polimeni, Rachel
  • Levine, David I.

Abstract

A standard test for adverse selection in health insurance examines whether people with characteristics predicting high health care utilization are more likely to buy insurance (or buy more generous nsurance). George Akerlof’s theory of adverse selection suggests a test based on prices: those who purchase insurance at the regular price will have higher expected utilization than those buying insurance when offered a deeply discounted price. Both tests provide (different) lower bounds on self-selection. We use a randomly allocated coupon for deeply discounted health insurance in rural Cambodia coupled with a longitudinal survey to test for adverse selection. While the standard test can show only a small amount of self-selection, the Prices test shows vastly more self-selection – providing a much more informative lower bound.

Suggested Citation

  • Polimeni, Rachel & Levine, David I., 2012. "Prices Matter: Comparing Two Tests of Adverse Selection in Health Insurance," Institute for Research on Labor and Employment, Working Paper Series qt135813k8, Institute of Industrial Relations, UC Berkeley.
  • Handle: RePEc:cdl:indrel:qt135813k8
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    Cited by:

    1. de Meza, David & Webb, David C., 2017. "False diagnoses: pitfalls of testing for asymmetric information in insurance markets," LSE Research Online Documents on Economics 65744, London School of Economics and Political Science, LSE Library.

    More about this item

    Keywords

    Business; D82; I13; Asymmetric and Private Information; Health Insurance;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private

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