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Research Seminars & Workshops @ IRES


Professor Fang Hanming

Department of Economics, University of Pennsylvania


Multidimensional Private Information, Market Structure and Insurance Market


Date:

22 June 2016 (Wednesday)

Time:

2.30pm - 4.30pm

Venue:

Lim Tay Boh Seminar Room (AS2 03-12)

Registration:

Please click HERE

This event is restricted to NUS Staffs and Students only


Abstract

A large empirical literature has found that the correlation between insurance purchase and ex post realization of risk is often statistically insignificant or negative, which is inconsistent with the predictions from the classic models of insurance a la Akerlof (1972), Pauly (1974) and Rothschild and Stiglitz (1976), where consumers differ only in their risk types. It is suggested that the selection based on multidimensional private information, e.g., risk type and risk preference type, may be able to reconcile the empirical findings. In this paper, we systematically investigate, under different market structures, whether selection based on multidimensional private information can result in negative association between insurance coverage and ex post realization of risk in equilibrium. We show that if the insurance market is perfectly competitive, selection based on multidimensional private information does not generate negative association property in equilibrium, unless there is a sufficiently high loading factor. If the insurance market is monopolistic, however, we show that it is possible to generate negative association property in equilibrium when risk type and risk preference type are sufficiently negative dependent, a notion we formalize using the concept of copula. We further show that this result generalizes to imperfectly competitive market structure. We also clarify the confusions in this growing literature about the connections between some of the important concepts such as adverse/advantageous selection and positive/negative association property.

About the Speaker

Hanming Fang is Class of 1965 Term Professor of Economics at the University of Pennsylvania and a Research Associate at the National Bureau of Economic Research (NBER) where he is currently also the Acting Director of its Chinese Economy Working Group.
Professor Fang is an applied microeconomist with broad theoretical and empirical interests focusing on public economics. His research covers topics ranging from discrimination, social economics, welfare reform, psychology and economics, to public good provision mechanisms, auctions, health insurance markets and population ageing. His research has been published in American Economic Review, Journal of Political Economy, Journal of Economic Theory, International Economic Review and many other leading journals of economics.
He is currently working on issues related to insurance markets, particularly the interaction between the labour market and the US health insurance reform as well as the interaction between insurance markets, housing markets and population ageing. He also studies issues related to discrimination and affirmative action. He has served as associate editor or co-editor for numerous journals in economics, and currently serves as a co-editor of the International Economic Review.
Professor Fang received his PhD in Economics from the University of Pennsylvania in 2000. Before joining the Penn faculty, he held positions at Yale University and Duke University.

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