An Empirical Examination of Information Barriers to Trade in Insurance

John Cawley and Tomas Philipson

No 5669, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: D8 G22 (search for similar items in EconPapers)
Date: 1996-07
Note: EH
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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

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Related works:
Journal Article: An Empirical Examination of Information Barriers to Trade in Insurance (1999)
Working Paper: An Empirical Examination of Information Barriers to Trade in Insurance (1997)
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