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Testing For Asymmetric Information In Insurance Markets With Unobservable Types

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  • Dardanoni, V
  • Li Donni, P

Abstract

In two important recent papers, Finkelstein and McGarry [25] and Finkelstein and Poterba [28] propose a new test for asymmetric information in insurance markets that considers explicitly unobserved heterogeneity in insurance demand. In this paper we propose an alternative implementation of the Finkelstein-McGarry-Poterba test based on the identification of unobservable types by use of finite mixture models. The actual implementation of our test follows some recent advances on marginal modelling as applied to latent class analysis; formal testing procedures for the null of asymmetric information and for the hypothesis that private information is indeed multidimensional can be performed by imposing restrictions on the behavior of these unobservable types. To show the potential applicability of our approach, we look at the long term insurance market as analyzed in Finkelstein and McGarry [25], where we also find strong evidence for both asymmetric information and multidimensional unobserved heterogeneity.

Suggested Citation

  • Dardanoni, V & Li Donni, P, 2008. "Testing For Asymmetric Information In Insurance Markets With Unobservable Types," Health, Econometrics and Data Group (HEDG) Working Papers 08/26, HEDG, c/o Department of Economics, University of York.
  • Handle: RePEc:yor:hectdg:08/26
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    References listed on IDEAS

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    4. Tomas J. Philipson & Gary S. Becker, 1998. "Old-Age Longevity and Mortality-Contingent Claims," Journal of Political Economy, University of Chicago Press, vol. 106(3), pages 551-573, June.
    5. Gourieroux,Christian & Monfort,Alain, 1995. "Statistics and Econometric Models," Cambridge Books, Cambridge University Press, number 9780521471626, April.
    6. 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.
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    Citations

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    Cited by:

    1. Li Donni, P., 2010. "Risk Preference Heterogeneity And Multiple Demand For Insurance," Health, Econometrics and Data Group (HEDG) Working Papers 10/17, HEDG, c/o Department of Economics, University of York.
    2. Karlsson, Martin & Klohn, Florian & Rickayzen, Ben, 2012. "Are the dimensions of private information more multiple than expected? Information asymmetries in the market of supplementary private health insurance in England," Darmstadt Discussion Papers in Economics 213, Darmstadt University of Technology, Department of Law and Economics.
    3. Christophe Dutang, 2012. "The customer, the insurer and the market," Post-Print hal-01616152, HAL.

    More about this item

    Keywords

    Asymmetric Information; Unobservable Types; Latent Class Analysis; Long Term Insurance Market.;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets

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