Illustrating Adverse Selection in Health Insurance Markets with a Classroom Game
AbstractThis paper describes a classroom game that illustrates the effects of asymmetric information and adverse selection in health insurance markets. The first part of this game simulates a market in which buyers can purchase insurance from sellers; in some periods, government regulation prevents sellers from using information about buyer type to determine premiums. The results demonstrate the classic prediction that asymmetric information will result in adverse selection. Here, low-risk buyers will forego the purchase of insurance at a measurable loss of potential earnings. In the second part of the game, sellers and buyers can trade two different types of health insurance policies, one moderate and another generous. Under government-mandated community rating and limits on premium increases, no buyers will purchase the generous plan. Questions are provided to stimulate discussion of the causes and consequences of adverse selection for consumers and insurers and possible solutions for employer- and government-sponsored programs.
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Bibliographic InfoArticle provided by Southern Economic Association in its journal Southern Economic Journal.
Volume (Year): 72 (2005)
Issue (Month): 2 (October)
Other versions of this item:
- Jennifer M. Mellor, 2004. "Illustrating Adverse Selection in Health Insurance Markets with a Classroom Game," Working Papers 11, Department of Economics, College of William and Mary, revised 18 Mar 2005.
- A2 - General Economics and Teaching - - Economic Education and Teaching of Economics
- C9 - Mathematical and Quantitative Methods - - Design of Experiments
- D4 - Microeconomics - - Market Structure and Pricing
- I1 - Health, Education, and Welfare - - Health
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