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

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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. In this paper  asymmetric information in crop insurance in the Philippines using a randomized field experiment. Using a combination of preference elicitation, a two-level randomized allocation of insurance and detailed data collection, tested for adverse selection, moral hazard and their interaction – that is, selection on anticipated moral hazard behavior. Findings shows that farmers behave very strategically and the data shows strong evidence of both adverse selection and moral hazard. Moral hazard is greater among those who report high trust in the insurance company. Direct tests of selection on moral hazard are inconclusive but findings shows that farmers prefer insurance on plots far from their home, an indirect indication that this effect is present. In conclusion information asymmetry problems are large and complex in this context and that they will be hard to overcome in a way that allows a self sustaining market.

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