Evidence of Adverse Selection in Automobile Insurance Markets

In this paper, we propose an empirical analysis of the presence of adverse selection in an insurance market. We first present a theoratical model of a market with adverse selection and we introduce different issues related to transaction costs, accident costs, risk aversion and moral hazard. We then discuss an econometric modeling based on latent variables and we derive its relationship with specification tests that may be useful to isolate the presence of adverse selection in the portfolio of an insurer.