Preference Heterogeneity and Insurance Markets: Explaining a Puzzle of Insurance

DSpace/Manakin Repository

Preference Heterogeneity and Insurance Markets: Explaining a Puzzle of Insurance

Citable link to this page

 

 
Title: Preference Heterogeneity and Insurance Markets: Explaining a Puzzle of Insurance
Author: Cutler, David; McGarry, Kathleen; Finkelstein, Amy

Note: Order does not necessarily reflect citation order of authors.

Citation: Cutler, David, Amy Finkelstein and Kathleen McGarry. 2008. Preference Heterogeneity and Insurance Markets: Explaining a Puzzle of Insurance. American Economic Review 98, no. 2: 157-162.
Full Text & Related Files:
Abstract: Standard theories of insurance, dating from Rothschild and Stiglitz (1976), stress the role of adverse selection in explaining the decision to purchase insurance. In these models, higher risk people buy full or near-full insurance, while lower risk people buy less complete coverage, if they buy at all. While this prediction appears to hold in some real world insurance markets, in many others, it is the lower risk individuals who have more insurance coverage. If the standard model is extended to allow individuals to vary in their risk tolerance as well as their risk type, this could explain why the relationship between insurance coverage and risk occurrence can be of any sign, even if the standard asymmetric information effects also exist. We present empirical evidence in five difference insurance markets in the United States that is consistent with this potential role for risk tolerance. Specifically, we show that individuals who engage in risky behavior or who do not engage in risk reducing behavior are systematically less likely to hold life insurance, acute private health insurance, annuities, long-term care insurance, and Medigap. Moreover, we show that the sign of this preference effect differs across markets, tending to induce lower risk individuals to purchase insurance in some of these markets, but higher risk individuals to purchase insurance in others. These findings suggest that preference heterogeneity may be important in explaining the differential patterns of insurance coverage in various insurance markets.
Published Version: http://dx.doi.org/10.1257/aer.98.2.157
Terms of Use: This article is made available under the terms and conditions applicable to Other Posted Material, as set forth at http://nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of-use#LAA
Citable link to this page: http://nrs.harvard.edu/urn-3:HUL.InstRepos:2640581
Downloads of this work:

Show full Dublin Core record

This item appears in the following Collection(s)

 
 

Search DASH


Advanced Search
 
 

Submitters