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False diagnoses: pitfalls of testing for asymmetric information in insurance markets

David de Meza and David C. Webb

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Established tests for asymmetric information in insurance markets are examined. The most commonly used, that information is symmetric if high and low cover contracts have the same loss rate, is inconsistent with standard assumptions that imply that under symmetric information, all contracts o¤er full-cover. Incomplete cover and symmetric information can be reconciled if there are claim-processing costs, but now existing tests fare badly, partly due to the divergence between marginal and average selection effects. Ignoring the nature of loading factors may cause recent studies to mismeasure the welfare costs of asymmetric information but these problems are remedial.

JEL-codes: G32 F3 G3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-hea and nep-ias
Date: 2017-04-05
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Published in The Economic Journal, 5, April, 2017. ISSN: 0013-0133

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