Prices Matter: Comparing Two Tests of Adverse Selection in Health Insurance

Rachel Polimeni and David Levine

Institute for Research on Labor and Employment, Working Paper Series from Institute of Industrial Relations, UC Berkeley

Abstract: A standard test for adverse selection in health insurance examines whether people with characteristics predicting high health care utilization are more likely to buy insurance (or buy more generous nsurance). George Akerlof’s theory of adverse selection suggests a test based on prices: those who purchase insurance at the regular price will have higher expected utilization than those buying insurance when offered a deeply discounted price. Both tests provide (different) lower bounds on self-selection. We use a randomly allocated coupon for deeply discounted health insurance in rural Cambodia coupled with a longitudinal survey to test for adverse selection. While the standard test can show only a small amount of self-selection, the Prices test shows vastly more self-selection – providing a much more informative lower bound.

Keywords: Business; D82; I13; Asymmetric and Private Information; Health Insurance (search for similar items in EconPapers)
Date: 2012-12-12
New Economics Papers: this item is included in nep-cta, nep-hea, nep-ias and nep-sea
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Citations: View citations in EconPapers (3)

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