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

de Meza, David and Webb, David C. (2017) False diagnoses: pitfalls of testing for asymmetric information in insurance markets. The Economic Journal. ISSN 0013-0133

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Identification Number: 10.1111/ecoj.12393

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.

Item Type: Article
Official URL: http://www.res.org.uk/view/economichome.html
Additional Information: © 2016 Royal Economic Society
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
H Social Sciences > HG Finance
Sets: Departments > Management
Research centres and groups > Managerial Economics and Strategy Group
Date Deposited: 15 Mar 2016 15:46
Last Modified: 19 Sep 2017 10:11
URI: http://eprints.lse.ac.uk/id/eprint/65744

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