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Public versus private insurance: a political economy argument

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  • HINDRIKS, Jean

Abstract

This paper analyzes the political support for a public insurance in the presence of a private insurance alternative. The public insurance is compulsory and offers a uniform insurance policy. The private insurance is voluntary and can offer different insurance policies to different individual risks. We show that adverse selection on the private insurance market can lead a majority of individuals to prefer public insurance over private insurance, even if the median risk is below theaverage risk (so that the median ends upsubsidizing high-risk individuals). We also show that more risk aversion always leads to a greater political support for public insurance and that a mixture of public and private insurance is politically non sustainable. Lastly, we demonstrate how progressively more powerful information technology may help the private insurance market to mitigate the adverse selection problem and reduce the demand for public insurance threatening its political sustainability.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2000058.

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Date of creation: 01 Dec 2000
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Handle: RePEc:cor:louvco:2000058

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Related research

Keywords: voting; insurance; adverse selection.;

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  1. Julia Lynn Coronado & Don Fullerton & Thomas Glass, 2000. "The Progressivity of Social Security," NBER Working Papers 7520, National Bureau of Economic Research, Inc.
  2. David Miles & Allan Timmermann, 1999. "Risk sharing and transition costs in the reform of pension systems in Europe," Economic Policy, CEPR & CES & MSH, vol. 14(29), pages 251-286, October.
  3. Cremer, H. & Pestieau, P., . "Redistributive taxation and social insurance," CORE Discussion Papers RP -1235, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Epple, Dennis & Romano, Richard E, 1996. "Public Provision of Private Goods," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 57-84, February.
  5. Mailath, George J, 1987. "Incentive Compatibility in Signaling Games with a Continuum of Types," Econometrica, Econometric Society, vol. 55(6), pages 1349-65, November.
  6. Jean Hindriks & Gareth D. Myles, 2006. "Intermediate Public Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262083442, December.
  7. Gouveia, Miguel, 1997. " Majority Rule and the Public Provision of a Private Good," Public Choice, Springer, vol. 93(3-4), pages 221-44, December.
  8. Eckstein, Zvi & Eichenbaum, Martin & Peled, Dan, 1985. "Uncertain lifetimes and the welfare enhancing properties of annuity markets and social security," Journal of Public Economics, Elsevier, vol. 26(3), pages 303-326, April.
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