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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, 127 (606). 2358 - 2377. ISSN 0013-0133

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Identification Number: 10.1111/ecoj.12393

Abstract

The widely applied ‘positive correlation test’ concludes that there is symmetric information in an insurance market if observationally identical buyers of high and low cover contracts have the same loss rate. As standard assumptions imply that only full‐cover contracts are bought when information is symmetric, a contradiction arises. The existence of a variety of contracts can be reconciled with symmetric information by claim‐processing costs but existing tests are then shown to fail. Ignoring the nature of loading factors may also cause recent studies to mismeasure the welfare costs of asymmetric information but these errors can be rectified.

Item Type: Article
Official URL: http://www.res.org.uk/view/economichome.html
Additional Information: © 2016 Royal Economic Society
Divisions: Management
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: 20 Oct 2020 05:08
URI: http://eprints.lse.ac.uk/id/eprint/65744

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