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Adverse Selection and Private Health Insurance Coverage in India A Rational Behaviour Model of Insurance Agents under Asymmetric Information

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  • Sukumar Vellakkal
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    Abstract

    In the backdrop of the low level of health insurance coverage in India, this study examines the determinants of the scaling-up process of health insurance by analyzing the rational behaviour of an insurance agent facing a trade-off between selling ‘health insurance’ and ‘other forms of insurance’ subject to his limited time and efforts, and the implications of such behaviour on adverse selection and equity. The paper presents various pre-conditions affecting the rational behaviour of insurance agents and also discusses two new concepts— ‘insurance habit’ and ‘asymmetric information on health insurance schemes’. Further, the study examines various strategies followed by insurance agents for maximizing their net incomes. The theoretical proposition is empirically validated by applying a binary Probit model and the primary data collected by the author is used in this context. The study concludes that given the existing incentive systems in the Indian insurance market for promoting various forms of insurance, the low level of insurance awareness among the general public, coupled with the dominant role of insurance agents in the market results in a situation of: 1. Low level of health insurance coverage, 2. No adverse selection and 3. Inequity in health insurance coverage. [Working Paper No. 233]

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    Bibliographic Info

    Paper provided by eSocialSciences in its series Working Papers with number id:2690.

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    Date of creation: Jul 2010
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    Handle: RePEc:ess:wpaper:id:2690

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    Keywords: Health Insurance; Insurance Agent; Asymmetric Information; Adverse Selection and Insurance Habit;

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    1. Wilson, Charles, 1977. "A model of insurance markets with incomplete information," Journal of Economic Theory, Elsevier, Elsevier, vol. 16(2), pages 167-207, December.
    2. Hajime Miyazaki, 1977. "The Rat Race and Internal Labor Markets," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 8(2), pages 394-418, Autumn.
    3. van de Ven, Wynand P. M. M. & van Vliet, ReneC. J. A., 1995. "Consumer information surplus and adverse selection in competitive health insurance markets: An empirical study," Journal of Health Economics, Elsevier, Elsevier, vol. 14(2), pages 149-169, June.
    4. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 84(3), pages 488-500, August.
    5. Cameron, A C & P. K. Trivedi & Frank Milne & J. Piggott, 1988. "A Microeconometric Model of the Demand for Health Care and Health Insurance in Australia," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 55(1), pages 85-106, January.
    6. Marquis, M. Susan, 1992. "Adverse selection with a multiple choice among health insurance plans: A simulation analysis," Journal of Health Economics, Elsevier, Elsevier, vol. 11(2), pages 129-151, August.
    7. Dror, David Mark & Radermacher, Ralf & Koren, Ruth, 2007. "Willingness to pay for health insurance among rural and poor persons: Field evidence from seven micro health insurance units in India," Health Policy, Elsevier, Elsevier, vol. 82(1), pages 12-27, June.
    8. Lant Pritchett & Lawrence H. Summers, 1996. "Wealthier is Healthier," Journal of Human Resources, University of Wisconsin Press, vol. 31(4), pages 841-868.
    9. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 90(4), pages 630-49, November.
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