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Medical insurance with rank-dependent utility

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Author Info

  • Matthew J. Ryan
  • Rhema Vaithianathan

Abstract

A well-known result in the medical insurance literature is that zero co-insurance is never second-best for insurance contracts subject to moral hazard. We replace the usual expected utility assumption with a version of the rank-dependent utility (RDU) model that has greater experimental support. When consumers exhibit such preferences, we show that zero co-insurance may in fact be optimal, especially for low-risk consumers. Indeed, it is even possible that the first-best and second-best contracts are identical. In this case, there is no “market failure”, despite the informational asymmetry. We argue that these RDU results are in better accord with the empirical evidence from US health insurance markets. Copyright Springer-Verlag Berlin Heidelberg 2003

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File URL: http://hdl.handle.net/10.1007/s00199-002-0336-1
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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 22 (2003)
Issue (Month): 3 (October)
Pages: 689-698

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Handle: RePEc:spr:joecth:v:22:y:2003:i:3:p:689-698

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Related research

Keywords: Keywords and Phrases: Health insurance; Rank-dependent expected utility; Co-insurance; Inverse-S transformation.; JEL Classification Numbers: D81; D82; G22.;

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Cited by:
  1. Azomahou, Theophile & Soete, Luc & Diene, Bity & Diene, Mbaye, 2012. "Optimal health investment with separable and non-separable preferences," MERIT Working Papers 047, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
  2. James Cox & Vjollca Sadiraj & Bodo Vogt & Utteeyo Dasgupta, 2013. "Is there a plausible theory for decision under risk? A dual calibration critique," Economic Theory, Springer, vol. 54(2), pages 305-333, October.

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