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Multiple Dimensions of Private Information: Evidence from the Long-Term Care Insurance Market
Amy Finkelstein and Kathleen McGarry
American Economic Review. Sep 2006, Vol. 96, No. 4: Pages 938-958

Multiple Dimensions of Private Information: Evidence from the Long-Term Care Insurance Market

Amy Finkelstein1,

1Department of Economics, Massachusetts Institute of Technology, E52-262F, 50 Memorial Drive, Cambridge, MA 02142, and National Bureau of Economic Research.

Kathleen McGarry2

2Department of Economics, UCLA, 8283 Bunche Hall, Box 951477, Los Angeles, CA 90095-1477.

Abstract

We demonstrate the existence of multiple dimensions of private information in the long-term care insurance market. Two types of people purchase insurance: individuals with private information that they are high risk and individuals with private information that they have strong taste for insurance. Ex post, the former are higher risk than insurance companies expect, while the latter are lower risk. In aggregate, those with more insurance are not higher risk. Our results demonstrate that insurance markets may suffer from asymmetric information even absent a positive correlation between insurance coverage and risk occurrence. The results also suggest a general test for asymmetric information.