Testing for asymmetric information in private health insurance

Abstract

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. ; Altres ajuts: RES-544-28-0001 ; 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.