Multiple Dimensions of Private Information in Life Insurance Markets
43 Pages Posted: 16 Nov 2013 Last revised: 29 Jan 2015
Date Written: November 2013
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.
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