Private Information and Insurance Rejections

Citation:

Hendren, Nathaniel. 2013. “Private Information and Insurance Rejections.” Econometrica 81 (5): 1713-1762.
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Abstract:

Across a wide set of nongroup insurance markets, applicants are rejected based on observable, often high-risk, characteristics. This paper argues that 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 in- formation could cause rejections. I then develop a new empirical methodology to test whether this no-trade condition can explain rejections. The methodology uses subjec- tive probability elicitations as noisy measures of agents’ beliefs. I apply this approach to three nongroup 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 infor- mation 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 that private information prevents the existence of large segments of these three major insurance markets.

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Last updated on 08/05/2015