Working Paper: NBER ID: w18282
Authors: Nathaniel Hendren
Abstract: Across a wide set of non-group insurance markets, applicants are rejected based on observable, often high-risk, characteristics. This paper argues 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 information could cause rejections. I then develop a new empirical methodology to test whether this no-trade condition can explain rejections. The methodology uses subjective probability elicitations as noisy measures of agents beliefs. I apply this approach to three non-group 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 information 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 private information prevents the existence of large segments of these three major insurance markets.
Keywords: private information; insurance; adverse selection; nongroup markets
JEL Codes: H0; I11; I13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Observable high-risk characteristics (X) (D91) | Private information about risk (P) (D81) |
| Private information about risk (P) (D81) | Insurance rejection (Y) (G22) |
| Observable high-risk characteristics (X) (D91) | Insurance rejection (Y) (G22) |