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Selection in Insurance Markets: Theory and Emprirics in Pictures

  • Liran Einav

    ()

    (Economics Department, Stanford University)

  • Amy Finkelstein

    ()

    (Massachusetts Institute of Technology)

We present a graphical framework for analyzing both theoretical and empirical work on selection in insurance markets. We begin by using this framework to review the "textbook" adverse selection environment and its implications for insurance allocation, social welfare, and public policy. We then discuss several important extensions to this classical treatment that are necessitated by important real world features of insurance markets and which can be easily incorporated in the basic framework. Finally, we use then same graphical approach to discuss the intuition behind recently developed empirical methods for testing for the existence of selection and examining its welfare consequences. We conclude by discussing some important issues that are not well-handled by this framework and which, perhaps not unrelatedly, have been little addressed by the existing empirical work.

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File URL: http://www-siepr.stanford.edu/repec/sip/10-016.pdf
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Paper provided by Stanford Institute for Economic Policy Research in its series Discussion Papers with number 10-016.

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Date of creation: Feb 2011
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Handle: RePEc:sip:dpaper:10-016
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  1. Mark Cullen & Liran Einav & Amy Finkelstein, 2009. "Estimating Welfare in Insurance Markets Using Variation in Prices," Discussion Papers 08-046, Stanford Institute for Economic Policy Research.
  2. De Meza, D. & Webb, D.C., 2000. "Advantageous Selection in Insurance Market," Discussion Papers 0007, Exeter University, Department of Economics.
  3. Einav, Liran & Finkelstein, Amy & Levin, Jonathan, 2009. "Beyond Testing: Empirical Models of Insurance Markets," Department of Economics, Working Paper Series qt90g407hf, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  4. Alma Cohen & Liran Einav, 2005. "Estimating Risk Preferences from Deductible Choice," NBER Working Papers 11461, National Bureau of Economic Research, Inc.
  5. 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.
  6. Alma Cohen & Peter Siegelman, 2009. "Testing for Adverse Selection in Insurance Markets," NBER Working Papers 15586, National Bureau of Economic Research, Inc.
  7. 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.
  8. repec:rje:randje:v:37:y:2006:i:4:p:783-798 is not listed on IDEAS
  9. David M. Cutler & Sarah J. Reber, 1998. "Paying For Health Insurance: The Trade-Off Between Competition And Adverse Selection," The Quarterly Journal of Economics, MIT Press, vol. 113(2), pages 433-466, May.
  10. 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.
  11. Benjamin M. Friedman & Mark Warshawsky, 1985. "The Cost of Annuities: Implications for Saving Behavior and Bequests," NBER Working Papers 1682, National Bureau of Economic Research, Inc.
  12. Joseph P. Newhouse, 2004. "Pricing the Priceless: A Health Care Conundrum," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262640589, June.
  13. Friedman, Benjamin M & Warshawsky, Mark J, 1990. "The Cost of Annuities: Implications for Saving Behavior and Bequests," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 135-54, February.
  14. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
  15. Hemenway, David, 1990. "Propitious Selection," The Quarterly Journal of Economics, MIT Press, vol. 105(4), pages 1063-69, November.
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