NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

An Empirical Examination of Information Barriers to Trade in Insurance

John Cawley, Tomas Philipson

NBER Working Paper No. 5669
Issued in July 1996
NBER Program(s):   HC

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.

download in pdf format
   (2312 K)

email paper

The NBER Bulletin on Aging and Health provides summaries of publications like this.  You can sign up to receive the NBER Bulletin on Aging and Health by email.

This paper is available as PDF (2312 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w5669

Published: Cawley, John, and Tomas Philipson. An Empirical Examination of Information Barriers to Trade in Insurance." American Economic Review, September 1999, 89(4): 827-846. citation courtesy of

Users who downloaded this paper also downloaded these:
Cutler, Finkelstein, and McGarry w13746 Preference Heterogeneity and Insurance Markets: Explaining a Puzzle of Insurance
Finkelstein and McGarry w9957 Private Information and its Effect on Market Equilibrium: New Evidence from Long-Term Care Insurance
Cohen and Siegelman w15586 Testing for Adverse Selection in Insurance Markets
McCarthy and Mitchell w9975 International Adverse Selection in Life Insurance and Annuities
Cutler and Zeckhauser Adverse Selection in Health Insurance
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us