The recipients of the 2011 Witt Award were Alma Cohen, Tel Aviv University, and Peter Siegelman, University of Connecticut School of Law, for “Testing for Adverse Selection in Insurance Markets,” March 2010, Volume 77, Issue 1, pages 39-84.
Abstract
This article 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 not be found in some pools of insurance policies. The presence of a coverage–risk correlation can be explained either by moral hazard or adverse selection, and we discuss methods for distinguishing between them. Finally, we review the evidence on learning by policyholders and insurers.