testing for asymmetric information in insurance markets the first goal of this paper is to provide a simple and general test of the presence of asymmetric information in contractual relationships within a competitive context we also argue that insurance data are particularly well suited to such empirical investigations to illustrate this claim we use data on contracts and accidents to investigate the extent of asymmetric information in the french market for automobile insurance using various parametric and nonparametric methods we find no evidence for the presence of asymmetric information in this market

selection effects in the united kingdom individual annuities market this paper explores adverse selection in the voluntary and compulsory individual annuity markets in the united kingdom two empirical regularities support standard models of adverse selection first annuitants are longer lived than non annuitants these mortality differences are more pronounced in the voluntary than in the compulsory annuity market we estimate that the amount of adverse selection in the compulsory market is about one half of that in the voluntary market second the pricing of different types of annuity products within each annuity market is consistent with individuals selecting products based in part on private information about their mortality prospects the aging of populations in many developed nations has generated substantial interest in the way households finance consumption in their retirement years annuities insurance products that provide a payment stream for as long as the insured individual is alive offer one way to spread an accumulated stock of resources over a retirement period of uncertain length theoretical research beginning with yaari 1965 suggests substantial utility gains from annuitisation in the presence of stochastic length of life public policy discussions have also generated substantial current interest in the operation of annuity markets the decline in long term interest rates in the united kingdom since the early 1990s has coincided with a decline in annuity payouts relative to annuity premia this has sparked a debate

expectations life expectancy and economic behavior this study analyzes responses to a questionnaire designed to elicit subjective expectations and probabilities of survival people do extrapolate past improvements in longevity when they determine their subjective horizons and they are fully aware of levels of and movements within todays life tables the subjective distribution has greater variance than its actuarial counterpart and the subjective variance decreases with age the implications of these findings for optimal social security for the construction of annuities for the analysis of savings behavior and for evaluating lifetime earnings are discussed the data were collected in the united states from a sample of 411 white male economists and a sample of 363 white males in a midwestern smsa excerpt

multiple dimensions of private information evidence from the long term care insurance market we demonstrate the existence of multiple dimensions of private information in the long term care insurance market two types of people purchase insurance individuals with private information that they are high risk and individuals with private information that they have strong taste for insurance ex post the former are higher risk than insurance companies expect while the latter are lower risk in aggregate those with more insurance are not higher risk our results demonstrate that insurance markets may suffer from asymmetric information even absent a positive correlation between insurance coverage and risk occurrence the results also suggest a general test for asymmetric information

differential mortality and wealth accumulation the issue of asset accumulation and decumulation is central to the life cycle theory of consumer behavior and to many policy questions one of the main implications of the life cycle model is that assets are decumulated in the last part of life most empirical studies in this area use cross sectional data of estimate mean or median wealth age profiles the use of cross sections to estimate the age profile of assets is full of pitfalls for example if wealth and mortality are related in that poorer individuals die younger one overestimates the last part of the wealth age profile when using cross sectional data because means or other measures of location are taken over a population which becomes richer as it ages this paper examines the effect of differential mortality on cross sectional estimates of wealth age profiles our approach is to quantify the dependence of mortality rates on wealth and use these estimates to correct wealth age profiles for sample selection due to differential mortality we estimate mortality rates as a function of wealth and age for a sample of married couples drawn from the survey of income and program participation sipp our results show that accounting for differential mortality produces wealth profiles with significantly more dissaving among the elderly

preference heterogeneity and selection in private health insurance the case of australia a basic prediction of theoretical models of insurance is that if consumers have private information about their risk of suffering a loss there will be a positive correlation between risk and the level of insurance coverage we test this prediction in the context of the market for private health insurance in australia despite a universal public system that provides comprehensive coverage for inpatient and outpatient care roughly half of the adult population also carries private health insurance the main benefit of which is more timely access to elective hospital treatment like several studies on different types of insurance in other countries we find no support for the positive correlation hypothesis because strict underwriting regulations create strong information asymmetries this result suggests the importance of multi dimensional private information additional analyses suggest that the advantageous selection observed in this market is driven by the effect of risk aversion the ability to make complex financial decisions and income

private information and insurance rejections 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 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 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 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 that private information prevents the existence of large segments of these three major insurance markets publication abstract

uncertainty resolution and the timing of annuity purchases abstract this paper considers the question of why the annuity market is thin a model is presented in which consumers have the option of purchasing annuities before discovering their survival probability they can then recontract the initial choice after the resolution of this form of uncertainty it is shown that consumers purchase insurance against their own survival probability type at a very young age and do not undertake further transactions this characterization is then used to analze the effects of introducing future income uncertainty and to investigate the trade off between old age insurance motive and portfilio flexibility

moral hazard and selection among the poor evidence from a randomized experiment not only does economic theory predict high risk individuals to be more likely to purchase insurance but insurance coverage is also thought to crowd out precautionary activities in spite of stark theoretical predictions there is conflicting empirical evidence on adverse selection and evidence on ex ante moral hazard is very scarce using data from the seguro popular experiment in mexico this paper documents patterns of selection on observables into health insurance as well as the existence of non negligible ex ante moral hazard more specifically the findings indicate that i agents in poor self assessed health prior to the intervention have all else equal a higher propensity to take up insurance and ii insurance coverage reduces the demand for self protection in the form of preventive care curiously however individuals do not sort based on objective measures of their health

adverse selection in insurance markets policyholder evidence from the u k annuity market in this paper we investigate the importance of adverse selection in insurance markets we use a unique data set consisting of all annuity policies sold by a large u k insurance company since the early 1980s to analyze mortality differences among individuals who purchased different types of policies we find systematic relationships between ex post mortality and annuity policy characteristics such as whether the annuity will make payments to the estate in the event of an untimely death and whether the payments from the annuity rise over time these mortality patterns are consistent with the presence of asymmetric information in the annuity market we find no evidence of substantive mortality differences however across annuities of different size even though models of insurance market equilibrium with asymmetric information would predict such differences we also find that the pricing of various features of annuity contracts is consistent with the self selection patterns we find in mortality rates our results therefore suggest that selection may occur across many specific features of insurance contracts and that the absence of selection on one contract dimension does not preclude its presence on others this highlights the importance of considering the detailed features of insurance contracts when testing theoretical models of asymmetric information

capital accumulation and uncertain lifetimes with adverse selection this paper examines the implications of adverse selection in the private annuity market for the pricing of private annuities and the consequent effects on constrption and bequest behavior with privately known heterogeneous mortality probabilities adverse selection causes the rate of return on private annuities to be less than the actuarially fair rate based on population average mortality however a fully funded social security system with compulsory participation can offer an implied rate of return equal to the actuarially fair rate based on population average mortality thus since social security offers a higher rate of return than private annuities consumers cannot completely offset the effects of social security by transacting in the private annuity market using an overlapping generations model with uncertain lifetimes we demonstrate that the introduction of actuarially fair social security reduces the steady state rate of return on annuities and raises the steady state levels of average bequests and average consumption of the young the steady state national capital stock rises or falls according to the strength of the bequest motive this abstract was borrowed from another version of this item

non exclusive competition in the market for lemons in order to check the impact of the exclusivity regime on equilibrium allocations we set up a simple akerlof like model in which buyers may use arbitrary taris under exclusivity we obtain the zero profit separating riley rothschilds stiglitz allocation under non exclusivity there is also a unique equilibrium allocation that involves a unique price as in akerlof 1970 these results can be applied to insurance in the dual model in yaari 1987 and have consequences for empirical tests of the existence of asymmetric information

an empirical examination of information barriers to trade in insurance this paper uses direct evidence to evaluate whether asymmetric information is a barrier to trade in the largest market for private insurance in the world life insurance we report several findings that seem difficult to reconcile with the conventional theory of insurance under asymmetric information we conjecture that sellers may know their costs of production better than consumers in this market as in those for most other products

paying for health insurance the trade off between competition and adverse selection we use data on health plan choices by employees of harvard university to compare the benefits of insurance competition with the costs of adverse selection moving to a voucher type system induced significant adverse selection with a welfare loss of 2 to 4 percent of baseline spending but increased competition reduced harvard s premiums by 5 to 8 percent the premium reductions came from insurer profits so while harvard was better off the net effect for society was only the adverse selection loss adverse selection can be minimized by adjusting voucher amounts for individual risk we discuss how such a system would work governments are increasingly turning to market forces as a way to limit the cost of social insurance traditionally social insurance programs were operated as nonmarket goods governments mandated participation in a central program collected revenues to finance the program and ran the insurance system there was no role for competition among suppliers in providing the basic benefit as the costs of social insurance have increased however the centralized model of social insurance is coming under increasing strain in the united states for example recent proposals have called for replacing the medicare program with a health care voucher for the elderly aaron and reischauer 1995 cutler 1996 the voucher would guarantee people a basic insurance plan but the plans would be privately run competition among plans would generate plan premiums and enrollments similarly longstanding proposals for social security reform have called for replacing the current system with a system of individual accounts where people would make saving investment and annuitization decisions on their own advisory council on social security 1996 feldstein 1996 the trend is not just domestic in the united kingdom the national health service has moved to encourage more competition in recent years with the establishment of hospital trusts that bid for patients and partially fixed payments to physicians

life expectancy and claiming behavior in a flexible pension system we study the relationship between early claiming of pensions and incentives in the highly flexible norwegian public pension system measuring incentives to claim based on an estimated model for expected longevity despite a strong correlation between incentives and claiming decisions the additional costs to public budgets arising from this selection turn out to be modest based on analyses exploiting only variation in expected pensions generated by variation in parental longevities and only claiming of pensions not in conjunction with retirement we conclude that part of the selection is active some individuals claim pensions early because they gain from doing so this article is protected by copyright all rights reserved

the term structure and inflation uncertainty abstract to assess the importance of inflation risk for nominal treasury yields a novel quadratic term structure model with time varying inflation risk is estimated using survey based inflation uncertainty the resulting yield decomposition captures very diverse macroeconomic dynamics of inflation and real risk premiums large and positive during the 1980s but small and negative post 2008 and generates sensible high frequency estimates of expected inflation and real short rates over a long sample the explicit link between the model implied factors and macro fundamentals reveals that short but not long run fluctuations are unspanned by yields consistent with an interest rate policy unresponsive to transient inflation shocks

the cost of annuities implications for saving behavior and bequests the fact that most elderly u s individuals maintain a flat age wealth profile rather than buy individual life annuities contradicts the standard life cycle consumption model average expected yields on individual life annuities in the united states during 1968 1983 were lower by 4 21 6 13 percent or 2 43 4 35 percent after allowing for adverse selection than yields on plausible alternative investments simulations of a model of saving and portfolio allocation show that during the early retirement years such yield differentials can account for the absence of annuity purchases even without a bequest motive at older ages the combination of such yield differentials and a bequest motive can do so it is common experience that as we grow older and nearer to eternity we become more not less anxious about money derek brewer chaucer and his world p 213

the balance between defined benefit defined contribution and state provision we examine the possible consequences of the increasing shift from defined benefit to defined contribution arrangements for private pensions whilst much analysis has focused on the possible distribution of investment and job tenure risk we point out the additional role for issues relating to adverse selection and to retirement incentives these issues are illustrated using empirical evidence from the united kingdom where the fact that private pensions are an alternative as opposed to a supplement to earnings related state pension provision makes the effects particularly salient jel i38 j32 d91

the choice between an annuity and a lump sum results from swiss pension funds this paper uses unique micro data from swiss employer based pension plans to study the annuitization decision at retirement the administrative nature of our data though limited with respect to individual background characteristics allows us to analyze real choices over large retirement balances rather than subjectively reported intentions to annuitize we find a strong and robust impact of a utility based measure of the annuity s value computed within a life cycle framework on individual annuitization rates low accumulation of retirement assets is strongly associated with the choice of the lump sum presumably due to the availability of means tested social assistance the sponsor s default option in most cases the annuity is also found to be highly influential in the decision to annuitize

new evidence on the money s worth of individual annuities this paper presents new information on the expected present discounted value of payouts on individual life annuities the annuity we examine is the single premium immediate life annuity an insurance product that pays out a nominal level sum as long as the covered person lives in exchange for an initial lump sum premium this annuity offers protection against the risk of someone outliving his saving given uncertainty about longevity for reasonable estimates of behavioral parameters we calculate that individual annuities are currently priced so that retirees without bequest motives should find these policies of substantial value in configuring their portfolios to smooth retirement consumption we also find that the expected present discounted value of payouts relative to the initial cost of the annuity has increased over the last decade these findings bear on the policy debate regarding the role of individual choice and self reliance in retirement planning this abstract was borrowed from another version of this item

bailouts and bank runs theory and evidence from tarp during the recent financial crisis there were bank runs right after government bailout announcements this paper develops a global game model of information based bank runs to analyze how the announcement of bailouts affects investors bank run incentives the equilibrium probability of bank runs is uniquely determined i conclude that before the announcement the existence of such bailout policy reduces investors bank run incentives but after the announcement investors may run on the bank since such an announcement reflects the government s information about the bad bank asset the empirical evidence from tarp is consistent with my theory