Working Paper: NBER ID: w19629
Abstract: Conventional theory for private information of adverse selection predicts a positive correlation between insurance coverage and ex post risk. This paper shows the opposite in the life insurance market despite the clear evidence of private information on mortality risk. The reason for this contradictory result is the existence of multiple dimensions of private information. The paper discusses how the private information on insurance preference offsets the effect of the private information on mortality risk. A mixture density model is applied to disentangle these two effects.
Keywords: Private Information; Life Insurance; Adverse Selection; Insurance Preferences
JEL Codes: D82; G22; I13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lower mortality risk (I12) | higher likelihood of purchasing life insurance (G52) |
| subjective survival probabilities (C41) | insurance purchases (G52) |
| subjective survival probabilities (C41) | subsequent mortality (J17) |
| higher perceived longevity (D15) | lower insurance uptake (G52) |
| higher perceived longevity (D15) | lower mortality rates (I14) |
| insurance preferences (G52) | effects of private information on mortality risk (I12) |
| higher education, employment status, and wealth (I24) | higher likelihood of purchasing life insurance (G52) |
| higher education, employment status, and wealth (I24) | lower likelihood of experiencing insured events (G52) |