Public versus private insurance: a political economy argument
AbstractThis 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 InfoPaper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2000058.
Date of creation: 01 Dec 2000
Date of revision:
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voting; insurance; adverse selection.;
Find related papers by JEL classification:
- H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health
- H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
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