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Heterogeneity, demand for insurance and adverse selection

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  • Spinnewijn, Johannes

Abstract

Recent evidence underlines the importance of demand frictions distorting insurance choices. Heterogeneous frictions cause the willingness to pay for insurance to be biased upward (relative to value) for those purchasing insurance, but downward for those who remain uninsured. The paper integrates this finding with standard methods for evaluating welfare in insurance markets and demonstrates how welfare conclusions regarding adversely selected markets are affected. The demand frictions framework also makes qualitatively different predictions about the desir- ability of policies like insurance subsidies and mandates, commonly used to tackle adverse selection.

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  • Spinnewijn, Johannes, 2017. "Heterogeneity, demand for insurance and adverse selection," LSE Research Online Documents on Economics 66511, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:66511
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    Cited by:

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    2. Camille Landais & Arash Nekoei & Peter Nilsson & David Seim & Johannes Spinnewijn, 2021. "Risk-Based Selection in Unemployment Insurance: Evidence and Implications," American Economic Review, American Economic Association, vol. 111(4), pages 1315-1355, April.
    3. Siegloch, Sebastian & Seibold, Arthur & Seitz, Sebastian, 2022. "Privatizing Disability Insurance," CEPR Discussion Papers 17568, C.E.P.R. Discussion Papers.
    4. Keith Marzilli Ericson & Philipp Kircher & Johannes Spinnewijn & Amanda Starc, 2021. "Inferring Risk Perceptions and Preferences Using Choice from Insurance Menus: Theory and Evidence," The Economic Journal, Royal Economic Society, vol. 131(634), pages 713-744.
    5. Amy Finkelstein & Nathaniel Hendren & Mark Shepard, 2017. "Subsidizing Health Insurance for Low-Income Adults: Evidence from Massachusetts," NBER Working Papers 23668, National Bureau of Economic Research, Inc.
    6. Benjamin R. Handel & Jonathan T. Kolstad & Johannes Spinnewijn, 2019. "Information Frictions and Adverse Selection: Policy Interventions in Health Insurance Markets," The Review of Economics and Statistics, MIT Press, vol. 101(2), pages 326-340, May.
    7. Cremer, Helmuth & Roeder, Kerstin, 2013. "Long-term care policy, myopia and redistribution," Journal of Public Economics, Elsevier, vol. 108(C), pages 33-43.
    8. Alex Rees-Jones & Dmitry Taubinsky, 2018. "Taxing Humans: Pitfalls of the Mechanism Design Approach and Potential Resolutions," Tax Policy and the Economy, University of Chicago Press, vol. 32(1), pages 107-133.
    9. Nathaniel Hendren & Camille Landais & Johannes Spinnewijn, 2021. "Choice in Insurance Markets: A Pigouvian Approach to Social Insurance Design," Annual Review of Economics, Annual Reviews, vol. 13(1), pages 457-486, August.
    10. Klaus Kultti & Yi Zheng, 2022. "Market Inefficiency, Entry Order and Coordination," SN Operations Research Forum, Springer, vol. 3(3), pages 1-22, September.
    11. Johannes Spinnewijn, 2017. "Heterogeneity, Demand for Insurance, and Adverse Selection," American Economic Journal: Economic Policy, American Economic Association, vol. 9(1), pages 308-343, February.
    12. Giles, John & Meng, Xin & Xue, Sen & Zhao, Guochang, 2021. "Can information influence the social insurance participation decision of China's rural migrants?," Journal of Development Economics, Elsevier, vol. 150(C).
    13. Kulawik, Jacek, 2018. "Neoclassical approach to traditional business insurance - introduction to the theory of agricultural insurance," Problems of Agricultural Economics / Zagadnienia Ekonomiki Rolnej 276371, Institute of Agricultural and Food Economics - National Research Institute (IAFE-NRI).
    14. Benjamin L. Collier & Daniel Schwartz & Howard C. Kunreuther & Erwann O. Michel‐Kerjan, 2022. "Insuring large stakes: A normative and descriptive analysis of households' flood insurance coverage," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 89(2), pages 273-310, June.
    15. Raj Chetty & Amy Finkelstein, 2012. "Social Insurance: Connecting Theory to Data," NBER Working Papers 18433, National Bureau of Economic Research, Inc.
    16. Benjamin R. Handel & Jonathan T. Kolstad, 2021. "The Affordable Care Act After a Decade: Industrial Organization of the Insurance Exchanges," NBER Working Papers 29178, National Bureau of Economic Research, Inc.
    17. Katherine R. H. Wagner, 2022. "Adaptation and Adverse Selection in Markets for Natural Disaster Insurance," American Economic Journal: Economic Policy, American Economic Association, vol. 14(3), pages 380-421, August.
    18. Hong Fu & Yuehua Zhang & Yinuo An & Li Zhou & Yanling Peng & Rong Kong & Calum G. Turvey, 2022. "Subjective and objective risk perceptions and the willingness to pay for agricultural insurance: evidence from an in-the-field choice experiment in rural China," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 47(1), pages 98-121, March.
    19. Liran Einav & Amy Finkelstein, 2023. "Empirical analyses of selection and welfare in insurance markets: a self-indulgent survey," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 48(2), pages 167-191, September.
    20. Benjamin R. Handel & Jonathan T. Kolstad, 2013. "Health Insurance for "Humans": Information Frictions, Plan Choice, and Consumer Welfare," NBER Working Papers 19373, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    Heterogeneity; adverse selection; demand frictions; insurance market interventions;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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