Experimental Identification of Asymmetric Information: Evidence on Crop Insurance in the Philippines

Abstract

Asymmetric information imposes costs on a wide range of markets and may explain why some important markets, such as most agricultural insurance markets, have failed to develop. It is hard to empirically identify the different dimensions of asymmetric information but doing so is crucial for improving efficiency and solving market failures. I develop a new experimental methodology and apply it to study asymmetric information in crop insurance in the Philippines. Using a combination of preference elicitation, a two-level randomized allocation of insurance and detailed data collection, I test for and find evidence of adverse selection, moral hazard and their interaction – that is, selection on anticipated moral hazard behavior. I conclude that information asymmetry problems are substantial in this context and that they are unlikely to be reduced appreciably through contract redesign alone.