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

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Author Info
Amy Finkelstein
Kathleen McGarry
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. (JEL A82, G22, I11)

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Publisher Info
Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 96 (2006)
Issue (Month): 4 (September)
Pages: 938-958
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Handle: RePEc:aea:aecrev:v:96:y:2006:i:4:p:938-958

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Pierre-Andre Chiappori & Bernard Salanie, 2001. "Testing for Asymmetric Information in Insurance Markets," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 56-78, February. [Downloadable!] (restricted)
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  2. Amy Finkelstein & Kathleen McGarry, 2003. "Private Information and its Effect on Market Equilibrium: New Evidence from Long-Term Care Insurance," NBER Working Papers 9957, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Jeffrey R. Brown & Amy Finkelstein, 2004. "Supply or Demand: Why is the Market for Long-Term Care Insurance So Small?," NBER Working Papers 10782, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. David McCarthy & Olivia S. Mitchell, 2003. "International Adverse Selection in Life Insurance and Annuities," NBER Working Papers 9975, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. David C. Grabowski & Jonathan Gruber, 2005. "Moral Hazard in Nursing Home Use," NBER Working Papers 11723, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Jeffrey R. Brown & Amy Finkelstein, 2004. "The Interaction of Public and Private Insurance: Medicaid and the Long-Term Care Insurance Market," NBER Working Papers 10989, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Li Gan & Michael Hurd & Daniel McFadden, 2003. "Individual Subjective Survival Curves," NBER Working Papers 9480, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Arnold Chassagnon & Bertrand Villeneuve, 2005. "Optimal risk-sharing under adverse selection and imperfect risk perception," Canadian Journal of Economics, Canadian Economics Association, vol. 38(3), pages 955-978, August. [Downloadable!] (restricted)
  9. Arnott, Richard J & Stiglitz, Joseph E, 1988. " The Basic Analytics of Moral Hazard," Scandinavian Journal of Economics, Blackwell Publishing, vol. 90(3), pages 383-413.
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  10. 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. [Downloadable!] (restricted)
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  11. Amy Finkelstein & Kathleen McGarry & Amir Sufi, 2005. "Dynamic Inefficiencies in Insurance Markets: Evidence from long-term care insurance," NBER Working Papers 11039, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. Michael D. Hurd & Kathleen McGarry, 2002. "The Predictive Validity of Subjective Probabilities of Survival," Economic Journal, Royal Economic Society, vol. 112(482), pages 966-985, October. [Downloadable!] (restricted)
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  13. 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. [Downloadable!] (restricted)
  14. Georges Dionne & Christian Gourieroux & Charles Vanasse, 2001. "Testing for Evidence of Adverse Selection in the Automobile Insurance Market: A Comment," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 444-473, April. [Downloadable!] (restricted)
  15. Mellor, Jennifer M., 2001. "Long-term care and nursing home coverage: are adult children substitutes for insurance policies?," Journal of Health Economics, Elsevier, vol. 20(4), pages 527-547, July. [Downloadable!] (restricted)
  16. Jullien, Bruno & Salanié, Bernard & Salanié, François, 2001. "Screening Risk Averse Agents Under Moral Hazard," CEPR Discussion Papers 3076, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  17. John Cawley & Tomas Philipson, 1996. "An Empirical Examination of Information Barriers to Trade in Insurance," NBER Working Papers 5669, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  18. Cardon, James H & Hendel, Igal, 2001. "Asymmetric Information in Health Insurance: Evidence from the National Medical Expenditure Survey," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 408-27, Autumn.
  19. Daniel S. Hamermesh, 1985. "Expectations, Life Expectancy, and Economic Behavior," NBER Working Papers 0835, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  20. Meglena Jeleva & Bertrand Villeneuve, 2004. "Insurance contracts with imprecise probabilities and adverse selection," Economic Theory, Springer, vol. 23(4), pages 777-794, May. [Downloadable!] (restricted)
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  21. Amy Finkelstein & Kathleen McGarry & Amir Sufi, 2005. "Dynamic Inefficiencies in Insurance Markets: Evidence from Long-Term Care Insurance," American Economic Review, American Economic Association, vol. 95(2), pages 224-228, May. [Downloadable!]
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jean Pinquet & Guillén Montserrat, 2008. "Long-Term Care: Risk Description of a Spanish Portfolio and Economic Analysis of the Timing of Insurance Purchase," Post-Print hal-00343104_v1, HAL. [Downloadable!]
  2. 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. [Downloadable!] (restricted)
    Other versions:
  3. John Ameriks & Andrew Caplin & Steven Laufer & Stijn Van Nieuwerburgh, 2007. "The Joy of Giving or Assisted Living? Using Strategic Surveys to Separate Bequest and Precautionary Motives," NBER Working Papers 13105, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. David Zimmer, 2008. "The Effect of the Consolidated Omnibus Reconciliation Act of 1985 on Health Care Utilization of Employment Separators," Contributions to Economic Analysis & Policy, Berkeley Electronic Press, vol. 8(2), pages 1840-1840. [Downloadable!] (restricted)
  5. Karlan, Dean S. & Zinman, Jonathan, 2007. "Observing Unobservables: Identifying Information Asymmetries with a Consumer Credit Field Experiment," CEPR Discussion Papers 6182, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  6. Liran Einav & Amy Finkelstein & Mark R. Cullen, 2008. "Estimating Welfare in Insurance Markets Using Variation in Prices," NBER Working Papers 14414, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Jonneke Bolhaar & Maarten Lindeboom & Bas van der Klaauw, . "A Dynamic Analysis of the Demand for Health Insurance and Health Care," Tinbergen Institute Discussion Papers 08-084/3, Tinbergen Institute. [Downloadable!]
    Other versions:
  8. 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. [Downloadable!]
  9. Liran Einav & Amy Finkelstein & Paul Schrimpf, 2007. "The Welfare Cost of Asymmetric Information: Evidence from the U.K. Annuity Market," NBER Working Papers 13228, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Nick Netzer & Florian Scheuer, 2006. "Competitive Screening in Insurance Markets with Endogenous Labor Supply," Discussion Papers of DIW Berlin 614, DIW Berlin, German Institute for Economic Research. [Downloadable!]
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