a comment on neudeck and podczeck s adverse selection and regulation in health insurance markets abstract using the grossman equilibrium concept neudeck and podczeck journal of health economics 15 1996 387 show that imposing a minimum standard on a perfectly competitive insurance market can result in anti competitive effects decreased welfare with some insurers earning positive profits however the grossman concept precludes an insurer from offering two separating cross subsidizing health plans when an insurer can offer multiple plans as under both the nash and miyazaki wilson equilibrium concepts i show that minimum standards result in a doubleton equilibrium never allow positive total profits and increase welfare this is of interest since in 1997 more than half of establishments in the us offering choice of multiple plans did so through a single insurer

bonus culture competitive pay screening and multitasking to analyze the impact of labor market competition on the structure of compensation we embed multitasking and screening within a hotelling framework competition for talent leads to an escalation of performance pay shifting effort away from long term investments risk management and cooperation efficiency losses can exceed those from a single principal who dulls incentives to extract rents as competition intensifies monopsonistic underincentivization of low skill agents first decreases and then gives way to growing overincentivization of high skill ones aggregate welfare is thus hill shaped while inequality tends to rise monotonically bonus caps can help restore balance in incentives but may generate other distortions

some reflections on insurance pricing we analyse three aspects of the recent evolution of french automobile insurance by use of three simple theoretical models the fantastic development of professional mutuals the growing complexity of tariffs the increasing recourse to product differentiation each of these aspects can be interpreted as a step further in the direction of increasing premiums personalization the question we examine is how far should we go

optimal income taxation with adverse selection in the labour market this article studies optimal linear and non linear redistributive income taxation when there is adverse selection in the labour market unlike in standard taxation models firms do not know workers abilities and competitively screen them through non linear compensation contracts unobservable to the government in a miyazaki wilson spence equilibrium adverse selection leads to different optimal tax formulas than in the standard mirrlees 1971 model because of the use of work hours as a screening tool by firms which for higher talent workers results in a rat race and for lower talent workers in informational rents and cross subsidies the most surprising result is that if the government has sufficiently strong redistributive goals welfare is higher when there is adverse selection than when there is not policies that endogenously affect adverse selection are discussed the model has practical implications for the interpretation estimation and use of taxable income elasticities which are central to optimal tax design

competition among differentiated health plans under adverse selection market power and adverse selection are prevalent features of the market for pre paid health plans however most of the literature on adverse selection considers extreme cases either perfect competition or monopoly if instead health plans are horizontally differentiated then i profits derived from each low risk are higher than from each high risk and ii when the profits derived from each high risk are negative cross subsidization a health authority as informed as the health plans can implement a pareto improvement both local and global deviations from cross subsidization are addressed within a nash equilibrium framework

the deadweight gain of insurance taxation when risky activities are optional abstract some risky activities are optional for example motoring participation in them is most attractive for good risks creating a tendency for advantageous selection in the associated insurance market taxing insurance consequently yields deadweight gains when type is hidden results are strengthened if optimism is present finally endogenising participation implies that the standard positive correlation test for the presence of policy relevant asymmetric information may fail

overconfidence and asymmetric information the case of insurance this paper contributes to the recent behavioral economics literature by showing that whether or not overconfidence changes qualitative predictions in asymmetric information markets may depend on the market structure itself we first show that overconfidence may overturn fundamental relations between observable variables in perfect competition asymmetric information insurance markets in monopolistic insurance markets in constrast we find that overconfidence may be observationally equivalent to variations in the risk composition of the economy our analysis provides a number of novel testable implications on i price heterogeneity within and across risk classes ii the relationship between ex post risk and insurance coverage iii the fact that a significant fraction of agents chooses to be uninsured and iv the relationship between underinsurance and age

macrodynamic adjustment mechanisms in india abstract the dynamic interplay among food prices manufacturing profitability and investments is investigated in a macrodynamic model of india the interaction between agriculture and the rest of the economy and the role of the income distribution are emphasized the dynamic mechanisms include investment response in agriculture and manufacturing and wage indexation the sixth five year plan is used to establish a trend growth reference path for the analysis policy experiments show trade offs among growth inflation and income distribution that should be taken into account when fiscal policies and investment strategies are decided

effects of insurance incentives on road safety evidence from a natural experiment in china we investigate the incentive effects of insurance experience rating on road safety by evaluating the claim frequency following a regulatory reform introduced in a pilot city of china our contribution to the growing literature on moral hazard is to offer a neat identification of a causal effect of experience rating on road safety by employing the differences in differences methodology in the framework of a natural experiment the pre treatment placebo test corroborates the assumption that the pilot city and the control city share the same pre reform time trends in claims we find that basing insurance pricing on traffic violations reduces claim frequency significantly these results are robust to the inclusion of vehicle controls alternative definitions of claim frequency two placebo experiment tests and several robustness checks the effects of basing pricing on past claims are not significant

non convexities and the efficiency of equilibria in insurance markets with asymmetric information abstract the nature of the efficiency frontier in models with adverse selection has not been studied in the literature we show that this frontier cannot always be strictly concave we obtain however that there is always a one to one correspondence between market equilibrium and second best efficiency whatever the shape of the efficiency frontier the results are illustrated with an insurance example

taxation insurance and precautionary labor we examine optimal taxation and social insurance with adverse selection in competitive insurance markets in a previous literature it has been shown that with perfect insurance markets social insurance improves welfare since it is able to redistribute without creating distortions this result has been taken as robust to the introduction of adverse selection as this would only provide additional justifications for social insurance we show however that adverse selection can weaken the case for social insurance compared to a situation with perfect markets whenever social insurance mitigates private underinsurance it also causes welfare reducing effects by decreasing precautionary labor supply and hence tax revenue in addition adverse selection may reduce the redistributive potential of social insurance we illustrate our general results using different equilibrium concepts for the insurance market notably we derive conditions under which a complete renunciation of social insurance is optimal and the government only relies on income taxation to achieve its redistributive objectives

a simple tax structure for competitive equilibrium and redistribution in insurance markets with asymmetric information in their influential paper rothschild and stiglitz 6 demonstrated that the existence of nash equilibrium is not a general property of insurance markets when buyers have private information about their riskiness and firms face free entry and exit conditions this paper presents a simple and implementable system of taxes and subsidies applied to firms which permits a nash equilibrium always to exist we also show that more than one nash equilibrium is open to the regulator in particular government can effect risk discriminating redistribution without a priori knowledge of any individual buyer s riskiness hence it is not the case that the inability to distinguish between types of buyers rules out compensation risk discriminating transfers even in principle as claimed by schmalensee 7 442 finally we show that even when a nash equilibrium exists without government intervention there are always alternative and under some circumstances pareto superior equilibria open to the regulator since these alternative equilibria entail cross subsidization from low risk to high risk buyers our results suggest that the well known cross subsidization enforced through current regulatory practices is consistent with economic efficiency we conclude that the informational asymmetry assumed by rothschild and stiglitz poses distinct efficiency and distribution problems as do more conventional non informational situations of market failure and that regulators can influence the allocation of insurance through conventional instruments of intervention without assuming dictatorial control of the market

the efficiency of competitive equilibria in insurance markets with asymmetric information abstract this paper addresses the relationship between competitive equilibria and efficient allocations in an insurance market with asymmetric information using the definition of second best efficiency proposed by harris and townsend 1981 for environments characterized by informational assmmetry the efficiency properties of several proposed market equilibria are examined we find an analogue to the first optimality theorem a miyazaki wilson equilibrium always results in a second best allocation

screening with convex menus and optimal flow taxation abstract this paper considers a family of screening problems in which the principal is constrained to offer only convex menus applications include i optimal flow taxation when individuals can substitute consumption and leisure inter temporally ii optimal product design for a linear pricing monopolist iii non exclusive cum linearly priced annuity markets a modified version of a myerson 1979 mirrlees 1971 direct mechanism in which standard incentive compatibility constraints are replaced by no convexification constraints can be used to compute optimal allocations in this family of problems in the flow taxation application the optimal tax schedule necessarily features progressive marginal tax rates typically features distortions at the top and can be analyzed by adapting standard ironing techniques

minimum standards insurance regulation and adverse selection evidence from the medigap market abstract this paper examines the implications of minimum standards for insurance markets i study the imposition of binding minimum standards on the market for voluntary private health insurance for the elderly the central estimates suggest that the introduction of the standards was associated with an 8 percentage point 25 decrease in the proportion of the population with coverage in the affected market with no evidence of substitution toward other unregulated sources of insurance coverage to explore possible factors contributing to the impact of the minimum standards i develop comparative static predictions of the impact of imposing minimum standards in an insurance market with adverse selection the observed changes in market equilibrium associated with the minimum standards are broadly consistent with these predictions providing evidence of the existence of adverse selection in this insurance market more importantly they suggest that the presence of adverse selection which in principle may provide an economic rationale for minimum standards in practice may have exacerbated the declines in insurance coverage associated with the minimum standards

harmful competition in insurance markets there is a general presumption that competition is a good thing in this paper we show that competition in the insurance markets can be bad and that adverse selection is in general worse under competition than under monopoly the reason is that monopoly can exploit its market power to relax incentive constraints by cross subsidization between different risk types cream skimming behavior on the contrary prevents competitive firms from using implicit transfers in effect monopoly is shown to provide better coverage to those buying insurance but at the cost of limiting participation to insurance performing simulation for different distributions of risk we find that monopoly in general performs much better than competition in terms of the realization of the gains from trade across all traders in equilibrium

food supply and inflation abstract the paper presents an analytic version of the latin american structuralist theory of inflation it emphasizes the difference between the productive sectors of the economy and draws attention to the fact that the inflationary process is closely linked to inconsistent claims for shares in income it describes a keynesian economy with two three sectors real desired wages are rigid money is passive it is shown that the structuralist hypotheses are capable of generating disequilibria that can lead to constantly rising prices without any built in mechanism to offset them steady inflation can only persist if workers allow their real wage to be kept below target as the workers try to catch on the model will blow up an accelerating inflation can be observed in many latin american countries during periods when wage settlements aimed at restoring inflation losses escaped the government control the paper also explores the implications of foreign trade it shows that under structuralist hypotheses external disequilibria cannot be corrected through exchange rate devaluations alone and it examines the stagflationary impacts of an increase in the price of imported intermediates

the firm as a nexus of treaties part 1 knowledge its acquisition sharing and or asymmetry the participatory generation of information rents and the theory of the firm masahiko aoki common knowledge and the co ordination of economic activities jacques cremer profit sharing information and employment matti pohjola part 2 vertical integration and the strategic management of the enterprise what is vertical integration michael h riordan vertical integration transaction costs and learning by using kurt lundgren the firm as a nexus of internal and external contracts torger reve part 3 issues of labour organization the viability of worker ownership an economic perspective on the political structure of the firm henry hansmann intellectual skill and the role of employees as constituent members of large firms in contemporary japan kazuo koike the implicit contract for corporate law firm associates ex post opportunism and ex ante bonding robert h mooking part 4 finance and the political structure of the firm capital structure as a mechanism of control a comparison of financial systems erik berglof long term contracts in financial markets hakan lindgren the principle of external accountability in competitive markets herbert gintis union militancy and plant designs kar ove moene can transaction cost economics explain trade associations marc schneiberg and j rogers hollingsworth

redistribution by insurance market regulation analyzing a ban on gender based retirement annuities we illustrate how equilibrium screening models can be used to evaluate the economic consequences of insurance market regulation we calibrate and solve a model of the united kingdom s compulsory annuity market and examine the impact of gender based pricing restrictions we find that the endogenous adjustment of annuity contract menus in response to such restrictions can undo up to half of the redistribution from men to women that would occur with exogenous social security like annuity contracts our findings indicate the importance of endogenous contract responses and illustrate the feasibility of employing theoretical insurance market equilibrium models for quantitative policy analysis

optimal student loans and graduate tax under moral hazard and adverse selection we characterize the set of second best optimal menus of student loan contracts in a simple economy with risky labour market outcomes adverse selection moral hazard and risk aversion the model combines student loans with an elementary optimal income tax problem the second best optima provide incomplete insurance because of moral hazard they typically involve cross subsidies between students generically optimal loan repayments cannot be decomposed as the sum of an income tax depending only on earnings and a loan repayment depending only on education therefore optimal loan repayments must be income contingent or the income tax must comprise a graduate tax the interaction of adverse selection and moral hazard i e self selection

adverse selection and regulation in health insurance markets abstract in this paper we look at various ways to regulate the health insurance market and ask whether they provide an answer to the problem of adverse selection to avoid inefficiency government policy must either effectuate some cross subsidization of insurance policies within the state sector or grant private insurance firms an exclusive right to serve certain groups of the population recent reforms in the netherlands and germany and president clinton s proposals for the us could be adapted to fulfil these requirements efficiency cannot be achieved on the other hand if the regulator tries to prescribe cross subsidization within the private sector

multiple dimensions of private information evidence from the long term care insurance market we demonstrate the existence of multiple dimensions of private information in the long term care insurance market two types of people purchase insurance individuals with private information that they are high risk and individuals with private information that they have strong taste for insurance ex post the former are higher risk than insurance companies expect while the latter are lower risk in aggregate those with more insurance are not higher risk our results demonstrate that insurance markets may suffer from asymmetric information even absent a positive correlation between insurance coverage and risk occurrence the results also suggest a general test for asymmetric information

computable general equilibrium models for development policy analysis in ldcs abstract the use of cge models has gained much popularity among policy analysts in ldcs and there is a fast growing body of literature on this area of economics in this survey the advantages of general equilibrium approach over partial equilibrium approach in analysing a wide range of policy issues are highlighted the evolution of cge modelling is discussed and more than 60 cge applications related to different policy issues in ldcs are surveyed this comprehensive survey shows that the cge models have become quite popular analytical tools among policy analysts in ldcs over the last decade or so the debate in the economic profession regarding the value and appropriateness of using cge models for policy analysis is examined in the final section of this paper some of the criticisms levelled at cge models are discussed and it is argued that despite this criticism such models are capable of providing insight into important policy problems

optimal risk sharing under adverse selection and imperfect risk perception the present paper thoroughly explores second best efficient allocations in an insurance economy with adverse selection we start with a natural extension of the classical model assuming less than perfect risk perception we characterize the con straints on efficient redistribution and we summarize the incidence of incentives on the economy with the notions of weak and strong adverse selection finally we show in what sense improving risk perception enhances welfare a typical situation where the risk perception of the insurer and that of policy holders differ is one in which each party knows something that the other does not the insurer may correctly assess the impact on risk of an individual s character istics without observing them all whereas policyholders may know all their characteristics without relating them correctly to their risks these simple obser vations call for a modelling of imperfect risk perception and adverse selection

the effects of redistributive taxation in credit markets with adverse selection abstract this paper studies the effects of redistributive taxation in credit markets with adverse selection and shows that there exists a range of taxes that creates pareto improvements relative to the zero tax market allocation by increasing aggregate investment for sufficiently high taxes an increase in the safe interest rate can be accompanied by an increase in investment

adverse selection and renegotiation in procurement as was shown by dewatripont optimal long term contracts are generally not sequentially optimal the parties ex post renegotiate them to their mutual advantage this paper fully characterizes the equilibrium of a simple two period procurement situation and studies the extent to which renegotiation reduces ex ante welfare i a central result is that like in the non commitment case the second period allocation is optimal for the principal conditionally on his posterior beliefs about the agent ii the first period allocation exhibits an increasing amount of pooling when the discount factor grows iii with a continuum of types it is never optimal to induce full separation the paper also analyzes whether renegotiated long term contracts yield outcomes resembling those under either unnegotiated long term contracts or a sequence of short term contracts and it links the analysis with the multiple unit durable good monopoly problem

cost observability and renegotiation abstract a project requires an initial specific investment the total cost of the project depends on the probability that the supplier will experience a delay in the production schedule this probability is the supplier s private information the buyer would like to hire a supplier with a low probability of delay however it can offer a screening contract only by committing to terminate the project if the supplier is not able to complete it within the original budget limits we show that cost observability may prevent the buyer from terminating a cost overrun project and this in turn prevents screening out bad suppliers thus we provide an example in which superior monitoring ability represents a disadvantage for the buyer this finding contrasts with the common argument that better monitoring represents an advantage of integrated organizations

adverse selection private information and lowballing in insurance markets recent contributions to the adverse selection literature have focused on a multiperiod competitive environment in this setting a clean distinction arises between the predictions of competing models cooper and hayes extend the model of rothschild and stiglitz to multiple periods the result is a self selecting equilibrium characterized by price highballing or systematically overcharging new business kunreuther and pauly suggest that information asymmetries between competing insurance firms render such price quantity policies infeasible their model results in a pooling equilibrium that is characterized by price lowballing or systematically undercharging new business our evidence is consistent with the kunreuther and pauly model and reveals the persistence of adverse selection in the automobile insurance market copyright 1990 by the university of chicago

efficient competitive equilibria with adverse selection do walrasian markets function orderly in the presence of adverse selection in particular is their outcome efficient when exclusive contracts are enforceable this paper addresses these questions in the context of a rothschild stiglitz insurance economy we identify an externality associated with the presence of adverse selection as a special form of consumption externality consequently we show that competitive equilibria always exist but are not typically incentive efficient however as markets for pollution rights can internalize environmental externalities markets for consumption rights can be designed to internalize the consumption externality due to adverse selection with such markets competitive equilibria exist and incentive constrained versions of the first and second welfare theorems hold

macrodynamic adjustment mechanisms in a dual semi industrialized economy abstract the interplay between agriculture and the rest of the economy and the importance of the income distribution have been central to the macroeconomic analyses of semi industrialized economies a macrodynamic model is developed to investigate the adjustment mechanisms in the medium run it is shown how the roles of agriculture and income distribution depend on the macroeconomic situation and how the medium run adjustments may differ from short run effects

transaction costs and equilibrium pricing of congested public goods with imperfect information abstract this paper examines the role of transaction costs in pricing a congested public facility which can be used with variable intensity when there exists information asymmetry between consumers and firms if a per visit price toll requires a large transaction cost of toll gates a lump sum price season ticket price may be used in equilibrium however under the lump sum price together with imperfect information high demanders in terms of visits to the facility have an incentive to patronize facilities designed for low demanders to exploit a price difference thus an adverse selection problem may arise and equilibrium is in general inefficient depending on the magnitude of the transaction cost

contract renegotiation and coasian dynamics consider a long term relationship between a seller and a buyer whose valuation for a per period service or a durable good is private as trade progresses the valuation will be partially revealed and it may be impossible for the parties to commit ex ante not to take advantage of this we analyse this situation first by supposing that the parties can sign a sequence of short term contracts and secondly by supposing that they can sign a long term contract but cannot commit not to renegotiate it later we find a close relationship in the second case between the optimal long term contract and the non commitment outcome in the standard coasian durable good model our results also have implications for hidden information principal agent models

incentive efficient price systems in large insurance economies with adverse selection we decentralize incentive efficient allocations in large adverse selection economies by introducing a competitive market for mechanisms that is for menus of contracts facing a budget constraint informed individuals purchase lottery tickets to enter mechanisms whereas firms sell tickets and supply slots at mechanisms at given prices beyond optimization market clearing and rational expectations an equilibrium requires that firms cannot favorably change or cut prices an equilibrium exists and is incentive efficient an equilibrium can be computed as the solution to a programming problem that selects the incentive efficient outcome preferred by the highest type within an appropriately defined set for two types economies this is the only equilibrium outcome

costly risk verification without commitment in competitive insurance markets abstract this paper analyzes the equilibrium of an insurance market where applicants for insurance have a duty of good faith when they reveal private information about their risk type insurers can at some cost verify the type of insureds who file a claim and they are allowed to retroactively void the insurance contract if it is established that the policyholder has misrepresented his risk when the contract was taken out however insurers cannot precommit to their risk verification strategy the paper analyzes the relationship between second best pareto optimality and the insurance market equilibrium in a game theoretic framework it characterizes the contracts offered at equilibrium the individuals contract choice as well as the conditions under which an equilibrium exists

endogenous adverse selection and unemployment insurance in this paper we consider how the presence of private information may explain the failure of the private sector to provide unemployment insurance in particular we show how the interaction of private information regarding employees preferences for work with the unobservable level of effort exerted on the job may explain the absence of private unemployment insurance we also reflect on the implications of our findings for the role of the public sector in providing unemployment insurance

perfect competition in markets with adverse selection this paper proposes a perfectly competitive model of a market with adverse selection prices are determined by zero profit conditions and the set of traded contracts is determined by free entry crucially for applications contract characteristics are endogenously determined consumers may have multiple dimensions of private information and an equilibrium always exists equilibrium corresponds to the limit of a differentiated products bertrand game we apply the model to establish theoretical results on the equilibrium effects of mandates mandates can increase efficiency but have unintended consequences with adverse selection an insurance mandate reduces the price of low coverage policies which necessarily has indirect effects such as increasing adverse selection on the intensive margin and causing some consumers to purchase less coverage

overconfidence insurance and paternalism it is well known that when agents are fully rational compulsory public insurance may make all agents better off in the rothschild and stiglitz 1976 model of insurance markets we find that when sufficiently many agents underestimate their personal risks compulsory insurance makes low risk agents worse off hence behavioral biases may weaken some of the well established rationales for government intervention based on asymmetric information

optimal unemployment insurance a survey unemployment insurance improves the allocation of risk bearing at the cost of reduced incentives for work in the past two decades a branch of the literature has emerged that deals with the optimal design of unemployment insurance this literature has been influenced by ideas and methods from information economics and by theories from labor economics the result is a collection of models designed to highlight a variety of issues pertaining to the provision of optimal unemployment insurance this paper reviews these issues summarizes the relevant literature assesses its accomplishments and points out problems that require further study

information incentives and organizational mode we examine the choice of organizational mode for a two stage production process wherein cost realizations at each stage are observed only by the producing party when these costs are positively correlated the principal prefers to undertake second stage production herself when the correlation is negative and sufficiently small she will prefer that the agent who performs the first stage also perform the second for large negative correlation either mode might be preferred when costs are uncorrelated the principal is indifferent between modes

the efficiency effects of categorical discrimination in the insurance industry recent public policy debate has focused concern on the equity dimensions of categorical discrimination based on sex age or race in insurance and similar markets we consider the efficiency effects of such discrimination and establish that costless imperfect categorization always enhances efficiency when categorization entails a nonnegligible resource cost however no unambiguous efficiency ranking of informational regimes is possible when categorization is costless we demonstrate that government having no better information than market participants can effect redistribution without assuming dictatorial control of the market implying that a market equilibrium with costless categorization is potentially pareto superior to one without it when categorization is costly however the market may categorize when pareto improvements are not possible

the social value of hidden information in adverse selection economies abstract when agents possess imperfect hidden knowledge at the time contracts are negotiated the social value of agents having access to additional hidden knowledge before contracts are implemented is positive to the extent that incentive constrained agents are sorted more finely but is negative to the extent that incentive constraining agents impose more stringent signalling requirements on others hence the intuition developed by hirshleifer 1971 marshall 1974 and milgrom and stokey 1982 that privately acquired information has neither positive nor negative social value when agents possess no prior hidden knowledge does not apply when agents possess imperfect hidden knowledge during contractual negotiations

price regulation in insurance markets with asymmetric information abstract the paper presents and discusses a regulatory policy in insurance markets it is based upon a two sided rule each company must propose at least one contract with full coverage and a ceiling is imposed on the level of premiums

constrained efficient equilibria in selection markets with continuous types abstract we prove the existence of the constrained efficient miyazaki 1977 wilson 1977 spence 1978 equilibrium in competitive markets with adverse selection when the distribution of unobservable types is continuous our existence proof applies under extremely general assumptions about individual preferences when we restrict preferences to have the widely used in the selection markets literature quasilinear form we characterize the properties of this equilibrium by developing a simple and computationally efficient numerical method for constructing it applying this method we show in a natural setting how one would compute the equilibrium allocation potentially facilitating empirical work using the mws equilibrium we illustrate this empirical application in the context of policy interventions and show that the welfare implications of a coverage mandate critically hinge on whether the market implements a constrained efficient allocation like the mws equilibrium or a constrained inefficient allocation like in azevedo and gottlieb 2017

a game theoretic foundation of competitive equilibria with adverse selection we construct an extensive form game that captures competitive markets with adverse selection it allows firms to offer any finite set of contracts so that cross subsidization is not ruled out moreover firms can withdraw from the market after initial contract offers have been observed we show that a subgame perfect equilibrium always exists in fact when withdrawal is costless the set of equilibrium outcomes may correspond to the entire set of feasible contracts we then focus on robust equilibria that continue to exist for small withdrawal costs we show that the miyazaki wilson contracts are the unique robust equilibrium outcome