Imperfect Private Information in Insurance Markets

Abstract

It is well known that private information can impair the functioning of insurance markets,
and widely documented that individuals misperceive their private information. But these two
facts are rarely analyzed jointly. I use panel data from a survey of the elderly that collects
subjective mortality risk elicitations and ex-post mortality experience to compare predicted risk
type with risk perception. I nd a clear link: High mortality risk individuals underestimate their
risk while low mortality risk individuals overestimate it. I demonstrate theoretically that this
covariance between risk type and risk misperception is central to the implications for equilibrium
and welfare relative to perfect private information. This suggests that welfare in some insurance
markets is impaired by individuals' imperfect perception of their private risk type, while it is
improved in others.