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

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 finitemixturemodel that conditions on unobserved typeswho 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. © 2015 Elsevier B.V. All rights reserved.