Working Paper: NBER ID: w15586
Authors: Alma Cohen; Peter Siegelman
Abstract: This paper reviews and evaluates the empirical literature on adverse selection in insurance markets. We focus on empirical work that seeks to test the basic coverage-risk prediction of adverse selection theory--that is, that policyholders who purchase more insurance coverage tend to be riskier. The analysis of this body of work, we argue, indicates that whether such a correlation exists varies across insurance markets and pools of insurance policies. We discuss various reasons why a coverage-risk correlation may be found in some pools of insurance policies but not in others. We also review the work on the disentangling of adverse selection and moral hazard and on learning by policyholders and insurers.
Keywords: adverse selection; insurance markets; coverage-risk correlation
JEL Codes: D82; G22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher risk (D81) | More extensive insurance coverage (G52) |
| More extensive insurance coverage (G52) | Positive coverage-risk correlation (G52) |
| Lack of useful private information (D82) | Absence of coverage-risk correlation (C10) |
| Inability to utilize private information (D82) | Absence of coverage-risk correlation (C10) |
| Superior predictive ability of insurers (G22) | Absence of coverage-risk correlation (C10) |
| Moral hazard (G52) | Positive coverage-risk correlation (G52) |