In two important recent papers, Finkelstein and McGarry [25] and Finkelstein and Poterba [28] propose a new test for asymmetric information in insurance markets that considers explicitly unobserved heterogeneity in insurance demand. In this paper we propose an alternative implementation of the Finkelstein-McGarry-Poterba test based on the identification of unobservable types by use of finite mixture models. The actual implementation of our test follows some recent advances on marginal modelling as applied to latent class analysis; formal testing procedures for the null of asymmetric information and for the hypothesis that private information is indeed multidimensional can be performed by imposing restrictions on the behavior of these unobservable types. To show the potential applicability of our approach, we look at the long term insurance market as analyzed in Finkelstein and McGarry [25], where we also find strong evidence for both asymmetric information and multidimensional unobserved heterogeneity.

Dardanoni, V., Li Donni, P. (2008). Testing For Asymmetric Information In Insurance Markets With Unobservable Types. In Health, Econometrics and Data Group Working Paper.

Testing For Asymmetric Information In Insurance Markets With Unobservable Types

DARDANONI, Valentino;LI DONNI, Paolo
2008-01-01

Abstract

In two important recent papers, Finkelstein and McGarry [25] and Finkelstein and Poterba [28] propose a new test for asymmetric information in insurance markets that considers explicitly unobserved heterogeneity in insurance demand. In this paper we propose an alternative implementation of the Finkelstein-McGarry-Poterba test based on the identification of unobservable types by use of finite mixture models. The actual implementation of our test follows some recent advances on marginal modelling as applied to latent class analysis; formal testing procedures for the null of asymmetric information and for the hypothesis that private information is indeed multidimensional can be performed by imposing restrictions on the behavior of these unobservable types. To show the potential applicability of our approach, we look at the long term insurance market as analyzed in Finkelstein and McGarry [25], where we also find strong evidence for both asymmetric information and multidimensional unobserved heterogeneity.
2008
Health, Econometrics and Data Group Working Paper
2008
19
Dardanoni, V., Li Donni, P. (2008). Testing For Asymmetric Information In Insurance Markets With Unobservable Types. In Health, Econometrics and Data Group Working Paper.
Proceedings (atti dei congressi)
Dardanoni, V; Li Donni, P
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10447/47431
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