The John M. Olin Center

Paper Abstract

651. Alma Cohen and Peter Siegelman, Testing for Adverse Selection in Insurance Markets, 11/09; subsequently published in The Journal of Risk and Insurance, Vol. 77, No. 1, March 2010, 39-84.

Abstract: This paper reviews and evaluates the empirical literature on adverse selection in insurance markets. We focus on empirical work that seeks to test the basic coverage–risk prediction of adverse selection theory—that is, that policyholders who purchase more insurance coverage tend to be riskier. The analysis of this body of work, we argue, indicates that whether such a correlation exists varies across insurance markets and pools of insurance policies. We discuss various reasons why a coverage–risk correlation may be found in some pools of insurance policies but not in others. We also review the work on the disentangling of adverse selection and moral hazard and on learning by policyholders and insurers.

651: PDF