The welfare cost of unpriced heterogeneity in insurance markets

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4 Citations (Scopus)

Abstract

We consider the welfare loss of unpriced heterogeneity in insurance markets, which results when private information or regulatory constraints prevent insurance companies to set premiums reflecting expected costs. We propose a methodology which uses survey data to measure this welfare loss. After identifying some “types” which determine expected risk and insurance demand, we derive the key factors defining the demand and cost functions in each market induced by these unobservable types. These are used to quantify the efficiency costs of unpriced heterogeneity. We apply our methods to the US Long-Term Care and Medigap insurance markets, where we find that unpriced heterogeneity causes substantial inefficiency.
Original languageEnglish
Pages (from-to)998-1028
Number of pages31
JournalRAND Journal of Economics
Volume47
Publication statusPublished - 2016

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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