Imperfect Private Information in Insurance Markets

53 Pages Posted: 23 Feb 2021 Last revised: 6 Aug 2021

See all articles by Adam Solomon

Adam Solomon

Massachusetts Institute of Technology (MIT) - Department of Economics

Date Written: February 17, 2021

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.

Suggested Citation

Solomon, Adam, Imperfect Private Information in Insurance Markets (February 17, 2021). Available at SSRN: https://ssrn.com/abstract=3787556 or http://dx.doi.org/10.2139/ssrn.3787556

Adam Solomon (Contact Author)

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

50 Memorial Drive
E52-391
Cambridge, MA 02142
United States

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