Multiple Dimensions of Private Information: Evidence from the Long-Term Care Insurance Market

Authors: Finkelstein, Amy; McGarry, Kathleen

Source: The American Economic Review, Volume 96, Number 4, September 2006 , pp. 938-958(21)

Publisher: American Economic Association

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Abstract:

We demonstrate the existence of multiple dimensions of private information in the long-term care insurance market. Two types of people purchase insurance: individuals with private information that they are high risk and individuals with private information that they have strong taste for insurance. Ex post, the former are higher risk than insurance companies expect, while the latter are lower risk. In aggregate, those with more insurance are not higher risk. Our results demonstrate that insurance markets may suffer from asymmetric information even absent a positive correlation between insurance coverage and risk occurrence. The results also suggest a general test for asymmetric information.

Document Type: Research article

DOI: http://dx.doi.org/10.1257/000282806779468427

Publication date: 2006-09-01

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The American Economic Review is a general-interest economics journal. The journal is published quarterly and contains articles on a broad range of topics. Established in 1911, the AER is among the nation's oldest and most respected scholarly journals in the economics profession.
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