Heterogeneity, Demand for Insurance and Adverse Selection

40 Pages Posted: 1 Mar 2012

See all articles by Johannes Spinnewijn

Johannes Spinnewijn

London School of Economics & Political Science (LSE)

Date Written: February 2012

Abstract

Recent empirical work finds that surprisingly little variation in the demand for insurance is explained by heterogeneity in risks. I distinguish between heterogeneity in risk preferences and risk perceptions underlying the unexplained variation. Heterogeneous risk perceptions induce a systematic difference between the revealed and actual value of insurance as a function of the insurance price. Using a sufficient statistics approach that accounts for this alternative source of heterogeneity, I find that the welfare conclusions regarding adversely selected markets are substantially different. The source of heterogeneity is also essential for the evaluation of different interventions intended to correct inefficiencies due to adverse selection like insurance subsidies and mandates, risk-adjusted pricing and information policies.

Keywords: adverse selection, heterogeneity, risk perceptions, welfare and policy

JEL Classification: D60, D82, D83, G28

Suggested Citation

Spinnewijn, Johannes, Heterogeneity, Demand for Insurance and Adverse Selection (February 2012). CEPR Discussion Paper No. DP8833, Available at SSRN: https://ssrn.com/abstract=2013824

Johannes Spinnewijn (Contact Author)

London School of Economics & Political Science (LSE) ( email )

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United Kingdom
00 44 (0) 20 7955 7022 (Phone)

HOME PAGE: http://econ.lse.ac.uk/staff/spinnewijn_johannes/

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