A simple test for private information in insurance markets with heterogeneous insurance demand

- Propose a simple test for asymmetric information in insurance markets with heterogeneous insurance demand.
- First results using a finite mixture model to disentangle the type of selection, adverse selection or advantageous selection.
- Identify the existence of private information, without using direct evidence of private information.

A positive correlation between insurance coverage and ex post risk indicates private information in insurance markets. However, this test fails if agents have heterogeneous risk attitudes. We propose a finite mixture model that conditions on unobserved types who differ in their risks preferences and detects asymmetric information even if heterogeneous risk attitudes exist. Our method identifies the existence of private information, without using direct evidence of private information.