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Evidence of Asymmetric Information in the Automobile Insurance Market: Dichotomous Versus Multinomial Measurement of Insurance Coverage
Author(s) -
Kim Hyojoung,
Kim Doyoung,
Im Subin,
Hardin James W.
Publication year - 2009
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/j.1539-6975.2009.01302.x
Subject(s) - multinomial distribution , information asymmetry , econometrics , measure (data warehouse) , multinomial probit , automobile insurance , empirical evidence , sample (material) , actuarial science , asymmetry , empirical research , economics , statistics , computer science , mathematics , microeconomics , data mining , philosophy , chemistry , epistemology , chromatography , probit model , physics , quantum mechanics
In the empirical analysis of information asymmetry in automobile insurance markets, prior research used a dichotomous measurement approach that induces excessive bundling in coverage measurements and sample selection biases. To improve on the conditional correlation method for testing information asymmetry, we propose a multinomial measurement approach that constructs coverage categories at ordered multinomial levels. With this approach, we find robust evidence of information asymmetry in both coverage area and coverage amount choices, which we could not find with the dichotomous measurement approach. It thus demonstrates the sensitivity of the empirical findings to the method used to measure insurance coverage.