Does Selection in Insurance Markets Always Favor Buyers?

Abstract

This paper provides empirical evidence of advantageous selection in insurance markets. By using a novel insurance setting where moral hazard is not a concern, I am able to distinguish selection from moral hazard. I find that takeup of area yield crop insurance in the US, where payouts are based on average county yields, are higher when county yields are higher (advantageous selection). I also find evidence of adverse selection based on last year's yields. I show that neither result is driven by price changes. Overall, the net selection into these plans favors insurance providers, not buyers.

Keywords: selection, crop insurance