This paper tests restrictions implied by the canonical theory of insurance under asymmetric information using ideal data that contains the self-perceived and actual mortality risk of individuals, as well as the price and quantity of their life insurance. We report several findings which are hard to reconcile with the canonical theory. First, we find a striking independence of self-perceived risk and the price of insurance. Second, we find strong evidence of the opposite type of non-linear pricing than predicted by theory: the theory predicts that prices rise with quantity, but we find that they fall. Third, we find that risk is negatively correlated with the quantity of insurance purchased although the theory predicts a positive correlation. Fourth, we find that a substantial fraction of individuals hold multiple insurance contracts, which casts doubt on the prediction that unit prices rise with quantity because multiple small contracts dominate a large one in such a case. Lastly, we test the accuracy of the self-perceived risk of the insured through estimating the induced profits they imply. We conclude by discussing the robustness of these results and the questions they raise for future theoretical models.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
5669.
Length: Date of creation: Jul 1996 Date of revision: Publication status: published as Cawley, John, and Tomas Philipson. An Empirical Examination of Information Barriers to Trade in Insurance." American Economic Review, September 1999, 89(4): 827-846. Handle: RePEc:nbr:nberwo:5669
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Find related papers by JEL classification: D8 - Microeconomics - - Information, Knowledge, and Uncertainty G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies
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.:
Carlson, John A & Parkin, J Michael, 1975.
"Inflation Expectations,"
Economica,
London School of Economics and Political Science, vol. 42(166), pages 123-38, May.
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