Testing For Asymmetric Information In Insurance Markets With Unobservable Types

Valentino Dardanoni () and Paolo Li Donni ()

Health, Econometrics and Data Group (HEDG) Working Papers from HEDG, c/o Department of Economics, University of York

Abstract: In two important recent papers, Finkelstein and McGarry [25] and Finkelstein and Poterba [28] propose a new test for asymmetric information in insurance markets that considers explicitly unobserved heterogeneity in insurance demand. In this paper we propose an alternative implementation of the Finkelstein-McGarry-Poterba test based on the identification of unobservable types by use of finite mixture models. The actual implementation of our test follows some recent advances on marginal modelling as applied to latent class analysis; formal testing procedures for the null of asymmetric information and for the hypothesis that private information is indeed multidimensional can be performed by imposing restrictions on the behavior of these unobservable types. To show the potential applicability of our approach, we look at the long term insurance market as analyzed in Finkelstein and McGarry [25], where we also find strong evidence for both asymmetric information and multidimensional unobserved heterogeneity.

Keywords: Asymmetric Information; Unobservable Types; Latent Class Analysis; Long Term Insurance Market. (search for similar items in EconPapers)
JEL-codes: D82 G22 I11 (search for similar items in EconPapers)
Date: 2008-10
New Economics Papers: this item is included in nep-cta, nep-ecm and nep-ias
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Citations: View citations in EconPapers (5)

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