Identification of adverse selection and moral hazard: evidence from a randomised experiment in Mongolia

Abstract

Insurance market failures are common in developing countries and one commonly proposed explanation for this is the presence of asymmetric information. In this paper I test for the relative importance of adverse selection and moral hazard for car insurance using a randomised experiment at the largest insurance company in Mongolia, randomly upgrading low coverage buyers to a higher coverage. With this experiment, I find significant ex-ante adverse selection for third party and theft risks, while there is no evidence of ex-post moral hazard for either risk. Moreover, I find no evidence of adverse selection or moral hazard for coverages differing in co-payment rates. I also discuss how certain market features, likely to be perceived as specific to this context, are common in other insurance markets in developing countries, and whether these factors are likely to be driving the results in this paper