Private Information and Insurance Rejections

Nathaniel Hendren

No 18282, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Across a wide set of non-group insurance markets, applicants are rejected based on observable, often high-risk, characteristics. This paper argues private information, held by the potential applicant pool, explains rejections. I formulate this argument by developing and testing a model in which agents may have private information about their risk. I first derive a new no-trade result that theoretically explains how private information could cause rejections. I then develop a new empirical methodology to test whether this no-trade condition can explain rejections. The methodology uses subjective probability elicitations as noisy measures of agents beliefs. I apply this approach to three non-group markets: long-term care, disability, and life insurance. Consistent with the predictions of the theory, in all three settings I find significant amounts of private information held by those who would be rejected; I find generally more private information for those who would be rejected relative to those who can purchase insurance; and I show it is enough private information to explain a complete absence of trade for those who would be rejected. The results suggest private information prevents the existence of large segments of these three major insurance markets.

JEL-codes: H0 I11 I13 (search for similar items in EconPapers)
Date: 2012-08
New Economics Papers: this item is included in nep-cta, nep-hea and nep-ias
Note: AG EH IO PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published as Nathaniel Hendren, 2013. "Private Information and Insurance Rejections," Econometrica, Econometric Society, vol. 81(5), pages 1713-1762, 09.

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