Asymmetric information and insurance: An experimental approach

Abstract

Separate identification of moral hazard and adverse selection in insurance markets is empirically difficult. To overcome this limitation, this paper develops a series of controlled laboratory experiments to examine how adverse selection and moral hazard separately affect agent performance in a real-effort task. We explore how agent performance changes across a baseline with no insurance option, a treatment where individuals can choose to purchase insurance, and a third treatment where individuals must purchase insurance. We believe our experimental design can be used as a wind-tunnel that is flexible enough to incorporate alternative price changes or contract designs while permitting researchers to separately identify moral hazard and adverse selection under those conditions.