Selection in Insurance Markets: Theory and Empirics in Pictures

37 Pages Posted: 31 Jan 2011 Last revised: 1 Feb 2011

See all articles by Liran Einav

Liran Einav

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Amy Finkelstein

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: January 2011

Abstract

We present a graphical framework for analyzing both theoretical and empirical work on selection in insurance markets. We begin by using this framework to review the "textbook" adverse selection environment and its implications for insurance allocation, social welfare, and public policy. We then discuss several important extensions to this classical treatment that are necessitated by important real world features of insurance markets and which can be easily incorporated in the basic framework. Finally, we use the same graphical approach to discuss the intuition behind recently developed empirical methods for testing for the existence of selection and examining its welfare consequences. We conclude by discussing some important issues that are not well-handled by this framework and which, perhaps not unrelatedly, have been little addressed by the existing empirical work.

Suggested Citation

Einav, Liran and Finkelstein, Amy, Selection in Insurance Markets: Theory and Empirics in Pictures (January 2011). NBER Working Paper No. w16723. Available at SSRN: https://ssrn.com/abstract=1749884

Liran Einav (Contact Author)

Stanford University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Amy Finkelstein

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Cambridge, MA 02142
United States
617-588-0361 (Phone)
617-868-7242 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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