Nonparametric Testing for Asymmetric Information

• Main Authors: SU, Liangjun, SPINDLER, Martin
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2010
• Subjects: Asymmetric information; Automobile insurance; Conditional independence; Distributional misspecification; Functional misspecification; Nonlinearity; Nonparametric test; Econometrics; Statistics and Probability
• Online Access: https://ink.library.smu.edu.sg/soe_research/1266; https://ink.library.smu.edu.sg/context/soe_research/article/2265/viewcontent/Nonparametric_Testing_for_Asymmetric_Information_2010_wp.pdf
• Institution: Singapore Management University

Asymmetric information is an important phenomenon in many markets and in particular in insurance markets. Testing for asymmetric information has become a very important issue in the literature in the last two decades. Almost all testing procedures that are used in empirical studies are parametric, which may yield misleading conclusions in the case of misspecification of either functional or distributional relationships among the variables of interest. Motivated by the literature on testing conditional independence, we propose a new nonparametric test for asymmetric information which is applicable in a variety of situations. We demonstrate the test works reasonably well through Monte Carlo simulations and apply it to an automobile insurance data set. Our empirical results consolidate Chiappori and Salanié’s (2000) findings that there is no evidence for the presence of asymmetric information in the French automobile insurance market.