general equilibrium rebound from energy efficiency innovation abstract energy efficiency improvements rebound when economic responses undercut their direct energy savings i show that general equilibrium channels typically amplify rebound by making consumption goods cheaper but typically dampen rebound by increasing demand for non energy inputs to production and by changing the size of the energy supply sector improvements in the efficiency of the energy supply sector generate especially large rebound because they make energy cheaper in all other sectors quantitatively general equilibrium channels reduce rebound in u s consumption good sectors from 39 to 28 but increase rebound in the energy supply sector from 42 to 80

endogenous skill biased technical change testing for demand pull effect in this article we use the unification of germany in 1990 to test the hypothesis that an increase in the supply of a production factor generates skill biased technical change we test for this mechanism in the context of the model presented by acemoglu and autor 2011 skills tasks and technologies implications for employment and earnings in o ashenfelter and d card eds handbook of labor economics vol 4b amsterdam north holland that allows endogenous assignment of skills to tasks in the economy we use cohorts of workers from comparable countries as a control group after discussing the possible confounding factors we conclude that this effect is absent the differential pattern among the countries seems to be determined by labor market flexibilization and tax reform

it based technical change and job instability we investigate the impact of it diffusion on the stability of employment we document the evolution of different components of job instability over a panel of 348 cities in france from the mid 1970s to the early 2000s the evidence goes against the view that the diffusion of it has spurred job instability yet analysing long term differences in the occupational structure we find that it diffusion has increased the share of high skill occupations at the expense of low skill occupations this is consistent with french firms reliance on their internal labour market to meet the new skill requirements associated with it diffusion

extending cost benefit analysis for energy investment choices abstract although cost benefit analysis is still widely practised because it addresses real and continuing problems the technique has been frequently called into question the present paper identifies three major limitations in the technique and offers suggestions for improvements while costs and benefits of energy investments have several dimensions cba attempts to give all effects an economic value this often requires arbitrary and subjective judgments which have discredited the technique it is proposed that cba should be extended from the single economic dimension to include three others environmental technical and the analysis of risk it is suggested that important subjective judgments should be made by the ultimate political decision maker and not by the analyst

aggregate comparative statics abstract in aggregative games each player s payoff depends on her own actions and an aggregate of the actions of all the players many common games in industrial organization political economy public economics and macroeconomics can be cast as aggregative games this paper provides a general and tractable framework for comparative static results in aggregative games we focus on two classes of games 1 aggregative games with strategic substitutes and 2 nice aggregative games where payoff functions are continuous and concave in own strategies we provide simple sufficient conditions under which positive shocks to individual players increase their own actions and have monotone effects on the aggregate the results are illustrated with applications to public good provision contests cournot competition and technology choices in oligopoly

on the theory of rational insurance purchasing a note the authors consider the optimal amount of insurance purchased by an individual who behaves according to the hurwicz criterion of choice under uncertainty their results are compared with earlier results obtained in alternative frameworks expected utility maximization and savage s regret criterion it is shown that a positive amount deductible is often suboptimal

what does human capital do a review of goldin and katz s the race between education and technology goldin and katz s the race between education and technology is a monumental achievement that supplies a unified framework for interpreting how the demand and supply of human capital have shaped the distribution of earnings in the u s labor market over the twentieth century this essay reviews the theoretical and conceptual underpinnings of this work and documents the success of goldin and katz s frame work in accounting for numerous broad labor market trends the essay also considers areas where the framework falls short in explaining several key labor market puzzles of recent decades and argues that these shortcomings can potentially be overcome by relaxing the implicit equivalence drawn between workers skills and their job tasks in the conceptual framework on which goldin and katz build the essay argues that allowing for a richer set of interactions between skills and technologies in accomplish ing job tasks both augments and refines the predictions of goldin and katz s approach and suggests an even more important role for human capital in economic growth than indicated by their analysis jel i20 j24 j31 o30

substitution between clean and dirty energy inputs a macroeconomic perspective in macroeconomic models the elasticity of substitution between clean and dirty energy inputs within the energy aggregate is a central parameter in assessing the necessary conditions for long run green growth using new sectoral data in a panel of 26 countries we formulate specifications of nested constant elasticity of substitution production functions that allow estimating this parameter for the first time we present evidence that it significantly exceeds unity a favorable condition for promoting green growth

innovation and industry evolution the theoretical literature on innovation has been concerned with a single innovation produced by a number of identical agents by contrast we consider a market in which one firm is the current incumbent while the remaining firms are challengers moreover we consider a sequence of innovations so that success does not imply that the successful firm reaps monopoly profits forever after but only until the next better innovation is developed we begin with a fully optimizing behavioral model and derive the equivalent of the schumpeterian process of creative destruction that is a firm enjoys temporary monopoly power but is soon overthrown by a more inventive challenger the essential point to grasp is that in dealing with capitalism we are dealing with an evolutionary process the fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers goods the new methods of production or transportation the new markets the new forms of industrial organization that capitalist enterprise creates schumpeter 1942 pp 82 83

a micro econometric analysis of risk aversion and the decision to self insure this study estimates a von neumann morgenstern utility function using market data and micro econometric methods we investigate the decision whether to purchase insurance against the risk of telephone line trouble in the home using the choices of approximately 10 000 residential customers we determine the shape of the utility function and the degree of risk aversion we find that risk aversion varies systematically in the population and varies with the level of income and that the observed choice behavior is consistent with expected utility maximization we are unable to detect the presence of ambiguity effects or over weighting of low probability events

consumer rationality and the status quo received microeconomic theory presumes rational consumers maximize utility over all commodity bundles recent analysis however suggests that a consumer s status quo may limit economic rationality bias consumer decisions and induce serious errors in survey based valuations of public and private goods using regression and choice theoretic frameworks we investigate the existence of status quo effects in the consumer valuation of a particular unpriced product the reliability of residential electrical service such valuations have become important in electric utility resource planning and rate making we find substantial status quo effects which must be addressed in welfare comparisons regarding electric service reliability

income and health spending evidence from oil price shocks health expenditures as a share of gdp in the united states have more than tripled over the past half century a common conjecture is that this is a consequence of rising income we investigate this hypothesis by instrumenting for local area income with time series variation in oil prices interacted with local oil reserves this strategy enables us to capture both partial equilibrium and local general equilibrium effects of income on health expenditures our central income elasticity estimate is 0 7 with 1 1 as the upper end of the 95 confidence interval which suggests that rising income is unlikely to be a major driver of the rising health expenditure share of gdp 2013 the president and fellows of harvard college and the massachusetts institute of technology

electricity planning under uncertainty risks margins and the uncertain planner abstract the uncertainty of plant performance and unpredictable demand for electricity has always been a problem for power system planners this consideration has come to dominate all others and this article presents a methodology which incorporates many of the uncertainties of power system planning in one model this model is then used to show that proposals to greatly lower planning margins entail high risks the effect of uncertainty on plant mix is shown to lead to greater installation of middle merit plant price regulation as a means of equilibrating supply and demand under uncertainty is shown to be of limited but distinct application

endowments output and the bias of directed innovation in this paper i ask the question does the output mix of countries change in response to changes in factor endowments if so how long does it take using data on capital as well as skilled and unskilled labour employed in three digit international standard industrial classification isic manufacturing industries for a sample of 27 developing and developed countries over the 1973 1990 period i find that the output mix of countries does not change in response to endowment changes even after 15 years this answer raises another question how then do countries absorb changes in factor endowments the data show that in both the short and long runs an increase in the supply of a production factor reduces its rate of return and makes it more intensively used in all sectors of the economy changes in production techniques in the long run the point estimate is that the reduction in the rate of return is more than 50 larger than in the short run this is consistent with induced innovations being predominantly biased towards the scarce factor

energy planning under uncertainty implications for coal processing and oil stocking policy abstract this study presents a method for quantifying the benefits of various ways of anticipating energy shortages the method is applied to coal liquefaction and oil stocking the study concludes that uncertainty about future energy supplies can improve the prospects for coal processing the results for oil stocking are consistent with actions already taken by government indicating that the assumption and methodology of the study are consistent with revealed preferences

equilibrium bias of technology this paper presents three sets of results about equilibrium bias of technology first i show that when the menu of technological possibilities only allows for factor augmenting technologies the increase in the supply of a factor induces technological change relatively biased toward that factor meaning that the induced technological change increases the relative marginal product of the factor becoming more abundant moreover this induced bias can be strong enough to make the relative marginal product of a factor increasing in response to an increase in its supply thus leading to an upward sloping relative demand curve i also show that these results about relative bias do not generalize when more general menus of technological possibilities are considered second i prove that under mild assumptions the increase in the supply of a factor induces technological change that is absolutely biased toward that factor meaning that it increases its marginal product at given factor proportions the third and most important result in the paper establishes the possibility of and conditions for strong absolute equilibrium bias whereby the price marginal product of a factor increases in response to an increase in its supply i prove that under some regularity conditions there will be strong absolute equilibrium bias if and only if the aggregate production function of the economy fails to be jointly concave in factors and technology this type of failure of joint concavity is possible in economies where equilibrium factor demands and technologies result from the decisions of different agents

endowment structures industrial dynamics and economic growth this paper develops a dynamic general equilibrium model to explore industrial evolution and economic growth in a closed developing economy the authors show that industries will endogenously upgrade toward the more capital intensive ones as the capital endowment becomes more abundant the model features a continuous inverse v shaped pattern of industrial evolution driven by capital accumulation as the capital endowment reaches a certain threshold a new industry appears prospers then declines and finally disappears while the industry is declining a more capital intensive industry appears and booms ad infinitum explicit solutions are obtained to fully characterize the whole dynamics of perpetual structural change and economic growth implications for industrial policies are discussed

a microfoundation for normalized ces production functions with factor augmenting technical change based on a tractable endogeneous technology choice framework we provide a microfoundation for aggregate normalized constant elasticity of substitution ces production functions with non neutral factor augmenting technical change in this framework firms are allowed to choose unit productivities of capital and labor optimally from a technology menu constructed under the assumption that unit factor productivities ufps are independently weibull distributed the weibull distribution itself is also microfounded here based on extreme value theory it is found to be an accurate and robust approximation of the true ufp distribution if technologies consist of a large number of complementary components

categorizing risks in the insurance industry this paper analyzes the welfare implications of imperfectly categorizing risks in the insurance industry under conditions of asymmetric information firms initially unable to distinguish the risk type of individuals are provided with imperfect information concerning risk membership the paper then compares various wilson type equilibria to determine the welfare implications of firms imperfectly categorizing risks it is shown that only in the case where the initial equilibrium is of the nash no subsidy type is there a pareto type improvement in welfare

theory general equilibrium and political economy in development economics i discuss the role of economic theory in empirical work in development economics with special emphasis on general equilibrium and political economy considerations i argue that economic theory plays should play a central role in formulating models estimates of which can be used for counterfactual and policy analysis i discuss why counterfactual analysis based on microdata that ignores general equilibrium and political economy issues may lead to misleading conclusions i illustrate the main arguments using examples from recent work in development economics and political economy

carbon leakage revisited unilateral climate policy with directed technical change using a stylized theoretical model we argue that current economic analyses of climate policy tend to over estimate the degree of carbon leakage as they abstract from the effects of induced technological change we analyse carbon leakage in a two country model with directed technical change where only one of the countries enforces an exogenous cap on emissions climate policy induces changes in relative prices that cause carbon leakage through a terms of trade effect however these changes in relative prices also affect the incentives to innovate in different sectors this leads to a counterbalancing induced technology effect which always reduces carbon leakage we therefore conclude that the leakage rates reported in the literature may be too high as these estimates neglect the effect of price changes on the incentives to innovate

which kind of directed technical change does china s economy have from the perspective of energy saving and low carbon abstract improvements in energy saving and low carbon technologies in the economic system are foundations of sustainable economic development therefore measuring the bias of technical change from the perspective of energy saving and low carbon is a prerequisite for clarifying whether economic growth is manifested as low carbon and sustainable in this paper the production function from the perspective of energy saving and low carbon in china is constructed and ridge regression is used to estimate it to measure energy and carbon bias in china s technical change the results indicate that technical change is biased towards energy use and carbon emissions relative to capital and labor but this bias is weakening in general china s economic system has always biased towards carbon emissions and its carbon biased technical change has the largest share in directed technical change however it is gradually shrinking

insurance and giffen s paradox abstract the letter gives a brief account of how insurance appears as an inferior good in standard economic analysis it is argued that this result is due to unrealistic assumptions about how insurance premiums are calculated

appropriate technology and balanced growth we provide a general theoretical characterization of how firms technology choice on a technology frontier determines the long run elasticity of substitution between capital and labour we show that the shape of the frontier determines factor shares and the elasticity of substitution between capital and labour if there are adjustment costs to technology choice the short and long run elasticities differ with the long run always higher if the technology frontier is log linear the production function becomes cobb douglas in the long run but consistent with empirical evidence short run dynamics are characterized by gross complementarity the approach is easily implementable and yields a powerful way to introduce ces type production functions in macroeconomic models we provide an illustration within an estimated dynamic general equilibrium model and show that the use of our production technology provides a good match for the short and medium run behaviour of the u s labour share

factor eliminating technical change endogenous growth requires that non reproducible factors of production be either augmented or eliminated attention heretofore has focused almost exclusively on augmentation in contrast we study factor elimination maximizing agents decide when to reduce the importance of non reproducible factors we use a cobb douglas production function with two factors of production one reproducible capital and one not labor there is no augmenting progress of any kind thus excluding the standard engine of growth what is new is the possibility of changing factor intensities endogenously by spending resources on r d the economy starts with no capital and no knowledge of how to use it by conducting r d the economy learns new technologies that use capital which then is built there are two possible ultimate outcomes the economy may achieve perpetual growth or it may stagnate with no growth the rst outcome is an asymptotic version of the ak model of endogenous growth and the second outcome is the standard solow model in the absence of any exogenous sources of growth which outcome is achieved depends on parameter values of saving and production and there always is a feasible saving rate that will give the perpetual growth outcome the model thus provides a theory of the endogenous emergence of a production technology with constant returns to the reproducible factors that is one that is capable of supporting perpetual economic growth the model also allows derivation of the full transition dynamics which have interesting properties one especially notable feature is that the origin is not a steady state an economy that starts with pure

indivisibilities inferior goods and giffen goods the paper shows how the presence of an indivisible good can cause a divisible good to be inferior and possibly giffen indivisibility is shown to be central to a discussion by j r hicks on inferior goods

the race between man and machine implications of technology for growth factor shares and employment we examine the concerns that new technologies will render labor redundant in a framework in which tasks previously performed by labor can be automated and new versions of existing tasks in which labor has a comparative advantage can be created in a static version where capital is fixed and technology is exogenous automation reduces employment and the labor share and may even reduce wages while the creation of new tasks has the opposite effects our full model endogenizes capital accumulation and the direction of research towards automation and the creation of new tasks if the long run rental rate of capital relative to the wage is sufficiently low the long run equilibrium involves automation of all tasks otherwise there exists a stable balanced growth path in which the two types of innovations go hand in hand stability is a consequence of the fact that automation reduces the cost of producing using labor and thus discourages further automation and encourages the creation of new tasks in an extension with heterogeneous skills we show that inequality increases during transitions driven both by faster automation and introduction of new tasks and characterize the conditions under which inequality is increasing or stable in the long run

estimation of state dependent utility functions using survey data surveys of individual s risk dollar trade offs illuminate not only the local trade off rates but also can be used to address more fundamental questions about the structure of utility functions this largely unexplored empirical area is investigated by developing an econometric technique to estimate utility functions based on survey data on risk dollar trade offs for minor health effects the empirical tests indicate that for all but one of the temporary health effects considered consumers treat injuries as tantamount to a drop in income implying that the health impact does not alter the structure of the utility function in a fundamental way copyright 1991 by mit press

rational insurance purchasing consideration of contract nonperformance much of the analysis of rational insurance purchasing and hedging strategies has been undertaken on the basis of the expected utility hypothesis this decision framework has been used to reformulate the bernoulli principle that a risk averter rationally would fully insure at a fair premium other applications include the analysis of insurance at unfair premiums mossin 1968 and smith 1968 the effects of state dependent utility on the rational insurance purchase cook and graham 1977 the effects of risky background wealth doherty and schlesinger 1983 and mayers and smith 1983 and the design of the optimal insurance policy raviv 1979 such analyses have been conducted on the assumption that insurance policies are free of insolvency default risk this assumption stands in sharp contrast to the actuarial literature in which the insolvency risk or probability of ruin is a central focus of attention

necessity is the mother of invention input supplies and directed technical change this study provides causal evidence that a shock to the relative supply of inputs to production can 1 affect the direction of technological progress and 2 lead to a rebound in the relative price of the input that became relatively more abundant the strong induced bias hypothesis i exploit the impact of the u s civil war on the british cotton textile industry which reduced supplies of cotton from the southern united states forcing british producers to shift to lower quality indian cotton using detailed new data i show that this shift induced the development of new technologies that augmented indian cotton as these new technologies became available i show that the relative price of indian u s cotton rebounded to its pre war level despite the increased relative supply of indian cotton this is the first paper to establish both of these patterns empirically lending support to the two key predictions of leading directed technical change theories

a note on risk aversion and preferences a note on risk aversion and preferences i introduction the theory of choice under uncertainty as presented for instance by debreu 1959 is formally identical with the theory of choice under certainty 1 yet the terminology used in the two types of problems is in practice quite different leading perhaps to an unnecessary amount of confusion use of the measures of absolute and relative risk aversion introduced by arrow 1971 and pratt 1964 provides a good example the analysis of economic behavior under uncertainty uses these measures extensively and the literature often attempts to give them intuitive appeal however some of the relationships between these risk aversion measures and basic properties of an individual s preference map remain unexplored this paper examines the relationship between arrow pratt measures of risk aversion and the standard income and substitution effects in certaintly problems in deriving and stating the main results section ii places particular emphasis on the relationship between relative risk aversion and the appropriately defined elasticity of substitution 2 section iii then shows how these results may be useful in such areas as the demand for insurance and in models with asymmetric information ii risk aversion and preferences to begin consider the following simple model of individual behavior under uncertainty there are taken to be two states of the world 1 and 2 w sub 1 alpha and w sub 2 alpha represent income in these states alpha is the individual s choice variable that affects w the specification of alpha depends on the problem under consideration 3 state 1 is taken to be the good state so that mathematical expression omitted it is assumed that an individual s preferences over prospects may be represented by a function of the form 1 mathematical expression omitted the sub utility function u w defined over income satisfies u 0 and mathematical expression omitted the usual interpretation of equation 1 is as an expected utility function where p is taken to be the subjective probability that state 2 occurs however for the purpose of this note it is more useful to view v as a specific additively separable form of a utility function when interpreted in this way it seems natural to examine the properties of v as one would with any utility function used in the analysis of behavior under certainty given the previous assumptions the indifference curves as defined by 1 are downward sloping and strictly convex to the origin in w sub 1 w sub 2 space additional properties of these indifference curves relate to measures of risk aversion as follows first following arrow 1971 and pratt 1964 define in the standard way the coefficient of absolute risk aversion 2 mathematical expression omitted and the coefficient of relative risk aversion 3 mathematical expression omitted next note that the elasticity of substitution of w sub 2 for w sub 1 may be defined in the conventional way as 4 mathematical expression omitted 4 for the function in 1 this can easily be shown to be given by 5 mathematical expression omitted simple algebra then reveals that 6 mathematical expression omitted this immediately implies that 7 mathematical expression omitted in interpreting this condition note that r sub r w may be greater than one for some values of w and less than one for other values the first inequality in 7 must hold in the same direction at both w sub 1 and w sub 2 in order for the condition to be met furthermore if utility is bounded from below then 7 can be used to show that 8 mathematical expression omitted 5 when relative risk aversion is not increasing the elasticity of substitution must be greater than one

agricultural intensification in ghana evaluating the optimist s case for a green revolution abstract while there are valid reasons for a renewed interest in adapting the lessons of the asian green revolution to the african setting research must go further in identifying the main and potentially unique drivers of agricultural intensification within and across african countries in this study we look at the case of ghana to identify whether fast population growth and the remarkable agricultural performance the country has enjoyed in recent years have resulted in favorable conditions for the adoption of asian style green revolution technologies through descriptive analysis combined with empirical assessment of the economic efficiency of agriculture in different production systems and agroecologies we are able assess the relevance of green revolution technologies for agricultural production in ghana in particular we analyze whether fertilizer use in ghana is associated with high population density and intensive cereal production and whether land intensive innovations are associated with more efficient production practices overall we do not find evidence of asian style green revolution agricultural intensification in ghana in fact we find no correlation between population density and input intensity we also find that labor costs still play a major role in ghanaian agricultural development in limiting the adoption of labor intensive technologies even in relatively high population density areas

directed technological change cross country income differences a quantitative analysis research aimed at understanding cross country income differences finds that inputs of human and physical capital play a limited role in explaining those differences however most of this work assumes workers with different education levels are perfect substitutes does moving away from this assumption affect our conclusions about the causes of long run development to answer this question we construct measures of skill specific productivity and barriers to innovation for a large sample of countries over the period 1910 2010 we use a model of endogenous directed technological change together with a new data set on output and labor force composition across countries we find that rich countries use labor of all skill categories more efficiently however in the absence or barriers to entry poor countries would actually be more efficient at using low skill labor our estimates imply that after 1950 the world technology frontier expanded much faster for college educated workers than for those with lower skill sets this technology diffused to many countries allowing even poorer countries to experience relatively robust growth of high skill specific productivity their gdp growth failed to reflect that because of their labor composition they have very few workers in the higher skilled category finally we investigate the relative importance of factor endowments versus barriers to technology in explaining the current disparities of standards of living and find it to depend crucially on the value of the elasticity of substitution between skill types under a lower value of 1 6 our model yields barrier estimates that are lower and relatively less important in explaining cross country income differences in this scenario physical and human capital account almost 70 of variance in 2010 gdp per worker in our sample using elasticity of 2 6 we find barriers that are higher and explain most of the variation in output we provide some evidence that the higher value of elasticity is preferred

insurance as a giffen good abstract can insurance be a giffen good this can never happen if the coefficient of relative risk aversion is less than or equal to one if this coefficient is greater than one it is possible but not empirically plausible

a tale of two cities and a giffen good a scenario is provided in which a house in eden mills ontario is a giffen good the conditions derived in the example apply to other indivisible goods as well jel classification d11

longevity and lifetime labor supply evidence and implications conventional wisdom suggests that increased life expectancy had a key role in causing a rise in investment in human capital i incorporate the retirement decision into a version of ben porath s 1967 model and find that a necessary condition for this causal relationship to hold is that increased life expectancy will also increase lifetime labor supply i then show that this condition does not hold for american men born between 1840 and 1970 and for the american population born between 1890 and 1970 the data suggest similar patterns in western europe i end by discussing the implications of my findings for the debate on the fundamental causes of long run growth

dynamic r d competition the authors study a simple two stage stochastic patent race involving two firms they examine the behavior of the participants as they gain the lead or fall behind in the race the authors find that the leader engages in rd 2 a policy of issuing patents for intermediate research results and 3 the effects of research joint ventures whereby the firms coordinate their initial research efforts and share their results copyright 1987 by royal economic society

the optimal insurance contract in a competitive market abstract the author reviews some earlier work on optimal insurance contracts by arrow and mossin he then shows that some results in this work carry over to any premium system which satisfies the additivity condition inherent in a competitive market

income risk aversion and the demand for insurance the expected utility hypothesis predicts that when the price of insurance is actuarially fair to the consumer a risk averse consumer will choose to fully insure against a potential loss the only role that income can play in affecting the amount of insurance demanded at the actuarially fair price is to affect the size of the potential loss this result is independent of the consumer s degree of risk aversion or how it varies with income however at a price of insurance above or below the actuarially fair level the consumer s degree of risk aversion and its relation to the consumer s income level must be considered if we are to usefully describe consumer behavior mossin 10 showed for a consumer with declining absolute risk aversion and at a price of insurance above the actuarially fair level but below the price at which no insurance will be purchased the optimal amount of insurance demanded against a loss of a given size is inversely related to the consumer s income chesney and louberge 2 noted that mossin s result does not take into account the empirically plausible situation in which higher income consumers may have greater potential losses to insure against they present results concerning the relationship between risk aversion and the level and composition of income in terms of the proportion of income subject to loss and the maximum premium the consumer would be willing to pay for full insurance coverage since their results are in terms of the maximum willingness to pay for full insurance

the impact of imperfectly categorizing risks on income inequality and social welfare the use of imperfect information to categorize risks is a pervasive and controversial phenomenon in the insurance industry although this activity reduces the average extent of vertical price discrimination it is shown in this paper that both highand low risk types may prefer ex ante to knowing the category to which they will be assigned that such information be suppressed furthermore for the lorenz criterion it is shown that under certain restrictive demand conditions the imperfect categorization of risks leads to an increase in inequality the paper employs the wilson e2 equilibrium concept l impact d une categorisation imparfaite des risques sur l inegalite du revenu et le bien etre social l utilisation de renseignements imparfaits pour categoriser les risques est un probleme important qui porte a controverses dans l industrie de i assurance meme si ce phenomene reduit le degre de discrimination verticale par les prix en moyenne i auteur montre que a la fois les personnes dont le coefficient de risques est faible et elev6 et ce avant de savoir a quelle categorie on va les assigner peuvent fort bien preferer que cette information soit supprimee de plus 1 auteur montre que sous certaines conditions de demande restrictives la categorisation imparfaite des risques conduit a un accroissement du degre d inegalite mesure par le critere de lorenz ce memoire utilise le concept d equilibre dit de wilson e2 if insurance firms are unable to distinguish between the risk types of their clients but consumers know their own probability of loss i e if asymmetric information persists then the complication of adverse selection may arise adverse selection occurs when the class of risks or set of classes that purchases insurance differs adversely from that anticipated by the firm for example if a firm offers a contract to low risk types at their actuarially fair rate then high risk types will also purchase it with the result that the firm will earn expected losses hence the problem of adverse selection restricts the ability of firms to offer efficient insurance contracts to low risk types it has been demonstrated by rothschild and stiglitz 1976 that provided the proportion of high risk types in the population is above some critical level a this paper is a revised version of chapter 3 of the author s phd thesis entitled the economics of risk classification in insurance london school of economics and political science 1982 i am indebted to my supervisor lucien foldes and an anonymous referee for useful comments the author alone is responsible for any errors herein canadian journal of economics revue canadienne d economique xvil no 3 august aotlt 1984 printed in canada imprimd au canada 0008 4085 84 557 568 1 50 c canadian economics association this content downloaded from 157 55 39 215 on wed 31 aug 2016 04 39 57 utc all use subject to http about jstor org terms