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Testing for Asymmetric Information in Private Health Insurance

Authors


  • Corresponding author: Pau Olivella, Department of Economics, Universitat Autónoma de Barcelona, 08193 Bellaterra, Spain. Email: pau.olivella@uab.es.

  • We are indebted to Phillips Blackburn, Erin Flood, Charlie McEwan, and Simon Moody for their contribution to our understanding of the private health insurance market in the UK. We are grateful for useful comments from Jörn–Steffen Pischke (Editor), and three anonymous referees, as well as Jerome Adda, James Bank, Sami Berlinski, Richard Blundell, Simon Burgess, Winnand Emmons, Emla Fitzsimons, Izabela Jelovac, Jonas Kinge, Matilde Machado, Inés Macho-Stadler, Judith Payne, Carol Propper, Lise Rochaix-Ranson, Bernard Salanié and other participants at seminars in Bristol, UCL, Imperial, City, Oslo, Chicago, Barcelona and Ankara. All remaining errors are our sole responsibility. Vera-Hernández acknowledges support from the ESRC Centre for the Microeconomic Analysis of Public Policy (RES-544-28-0001). Olivella acknowledges the support of the Government of Catalonia, project 2009SGR-169; as well as from the Ministerio de Educación y Ciencia, project ECO2009-07616 and CONSOLIDER-INGENIO CSD2006-16. Olivella is a Research Fellow of MOVE.

Abstract

We test for asymmetric information in the UK private health insurance (PHI) market. In contrast to earlier research that considers either a purely private system or one where private insurance is complementary to public insurance, PHI is substitutive of the public system in the UK. Using a theoretical model of competition among insurers incorporating this characteristic, we link the type of selection (adverse or propitious) with the existence of risk-related information asymmetries. Using the British Household Panel Survey, we find evidence that adverse selection is present in the PHI market, which leads us to conclude that such information asymmetries exist.

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