NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

NBER Working Papers by Feng Huang

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Working Papers

January 2011A Simple Test of Private Information in the Insurance Markets with Heterogeneous Insurance Demand
with Li Gan, Adalbert Mayer: w16738
A positive correlation between insurance coverage and ex post risk can be an indicator for private information in insurance markets. However, this test fails if agents have heterogeneous risk attitudes. We propose a new test that conditions on unobserved types of individuals who differ in their risks preferences. This makes it possible to detect asymmetric information without direct evidence of private information - even if agents have heterogeneous risk attitudes. We apply our technique to the market for long-term care insurance. Finkelstein and McGarry (2006) provide direct evidence for the existence of private information in this market. At the same time they fail to find a positive correlation between insurance coverage and ex post risk. Our method indicates the existence of private in...

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