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Does Selection in Insurance Markets Always Favor Buyers?

  • Deryugina, Tatyana

This paper provides empirical evidence of advantageous selection in insurance markets. By using a novel insurance setting where moral hazard is not a concern, I am able to overcome an important obstacle in most studies of selection: the inability to distinguish moral hazard from selection. In the US market for area yield crop insurance, payouts are based on average county yields. Moreover, area yield insurance is only offered in counties where no farmer is large enough to affect the mean yield. I find that area yield insurance takeup is higher when average yields in the county are higher and show that this effect is not being driven by prices. This suggests that the net selection into these plans thus favors insurance providers, not buyers. One possible mechanism is that providers have better information about aggregate yields. Another is that the desirability of other, non-area yield, insurance options changes, a potentially important but previously overlooked driver of selection.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 53583.

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Date of creation: 06 May 2012
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Handle: RePEc:pra:mprapa:53583
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  1. Jeffrey R. Brown & Amy Finkelstein, 2007. "Why is the market for long-term care insurance so small?," NBER Chapters, in: Trans-Atlantic Public Economics Seminar (TAPES), Public Policy and Retirement, pages 1967-1991 National Bureau of Economic Research, Inc.
  2. De Meza, D. & Webb, D.C., 2000. "Advantageous Selection in Insurance Market," Discussion Papers 0007, Exeter University, Department of Economics.
  3. Tomas Philipson & John Cawley, 1999. "An Empirical Examination of Information Barriers to Trade in Insurance," American Economic Review, American Economic Association, vol. 89(4), pages 827-846, September.
  4. 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.
  5. Villeneuve, Bertrand, 2005. "Competition between insurers with superior information," European Economic Review, Elsevier, vol. 49(2), pages 321-340, February.
  6. Liran Einav & Amy Finkelstein & Stephen P. Ryan & Paul Schrimpf & Mark R. Cullen, 2011. "Selection on Moral Hazard in Health Insurance," NBER Working Papers 16969, National Bureau of Economic Research, Inc.
  7. Alma Cohen & Peter Siegelman, 2009. "Testing for Adverse Selection in Insurance Markets," NBER Working Papers 15586, National Bureau of Economic Research, Inc.
  8. David M. Cutler & Sarah Reber, 1996. "Paying for Health Insurance: The Tradeoff between Competition and Adverse Selection," NBER Working Papers 5796, National Bureau of Economic Research, Inc.
  9. Vincent H. Smith & Barry K. Goodwin, 1996. "Crop Insurance, Moral Hazard, and Agricultural Chemical Use," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(2), pages 428-438.
  10. Jerry R. Skees & J. Roy Black & Barry J. Barnett, 1997. "Designing and Rating an Area Yield Crop Insurance Contract," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(2), pages 430-438.
  11. Walters, Cory G. & Shumway, C. Richard & Chouinard, Hayley H. & Wandschneider, Philip R., 2007. "The Effects of Transitional Yields on Adverse Selection in Crop Insurance," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 9849, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  12. Hanming Fang & Michael P. Keane & Dan Silverman, 2006. "Sources of Advantageous Selection: Evidence from the Medigap Insurance Market," NBER Working Papers 12289, National Bureau of Economic Research, Inc.
  13. Ker, Alan P. & McGowan, Pat, 2000. "Weather-Based Adverse Selection And The U.S. Crop Insurance Program: The Private Insurance Company Perspective," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 25(02), December.
  14. Bertrand Villeneuve, 2000. "The Consequences for a Monopolistic Insurance Firm of Evaluating Risk Better than Customers: The Adverse Selection Hypothesis Reversed," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 25(1), pages 65-79, June.
  15. Keith H. Coble & Thomas O. Knight & Rulon D. Pope & Jeffery R. Williams, 1997. "An Expected-Indemnity Approach to the Measurement of Moral Hazard in Crop Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(1), pages 216-226.
  16. Amy Finkelstein & James Poterba, 2002. "Selection Effects in the United Kingdom Individual Annuities Market," Economic Journal, Royal Economic Society, vol. 112(476), pages 28-50, January.
  17. Olivier Desch�nes & Michael Greenstone, 2007. "The Economic Impacts of Climate Change: Evidence from Agricultural Output and Random Fluctuations in Weather," American Economic Review, American Economic Association, vol. 97(1), pages 354-385, March.
  18. 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.
  19. Philippe Donder & Jean Hindriks, 2009. "Adverse selection, moral hazard and propitious selection," Journal of Risk and Uncertainty, Springer, vol. 38(1), pages 73-86, February.
  20. Sumit Agarwal & Souphala Chomsisengphet & Chunlin Liu, 2010. "The Importance of Adverse Selection in the Credit Card Market: Evidence from Randomized Trials of Credit Card Solicitations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(4), pages 743-754, 06.
  21. Grabowski, David C. & Gruber, Jonathan, 2007. "Moral hazard in nursing home use," Journal of Health Economics, Elsevier, vol. 26(3), pages 560-577, May.
  22. S. Hun Seog, 2009. "Insurance Markets With Differential Information," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(2), pages 279-294.
  23. He, Daifeng, 2009. "The life insurance market: Asymmetric information revisited," Journal of Public Economics, Elsevier, vol. 93(9-10), pages 1090-1097, October.
  24. Amy Finkelstein & Kathleen McGarry, 2006. "Multiple Dimensions of Private Information: Evidence from the Long-Term Care Insurance Market," American Economic Review, American Economic Association, vol. 96(4), pages 938-958, September.
  25. Sloan, Frank A & Norton, Edward C, 1997. "Adverse Selection, Bequests, Crowding Out, and Private Demand for Insurance: Evidence from the Long-Term Care Insurance Market," Journal of Risk and Uncertainty, Springer, vol. 15(3), pages 201-19, December.
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