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On the Political Economy of Adverse Selection

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Author Info
Hervé Crès (HEC School of Management)
Mich Tvede (Department of Economics, University of Copenhagen)

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Abstract

We consider a standard insurance economy where consumers are supposed to vote over menus of insurance contracts: A menu of contracts is majority stable if there does not exist another menu which is supported by an appropriate majority of consumers. We compute the smallest level of super majority for which there always exists a stable menu of contracts, and such that all stable menus of contracts are Pareto optimal. Lower super majority voting rules may ensure existence of stable menus if individual states and/or types of consumers are aggregated, but then stable menus of contracts need not be Pareto optimal: hence a trade-off between Pareto optimality and conservativeness of the voting rule is exhibited.

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Publisher Info
Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 05-14.

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Length: 6 pages
Date of creation: May 2005
Date of revision: Jun 2006
Handle: RePEc:kud:kuiedp:0514

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Find related papers by JEL classification:
D7 - Microeconomics - - Analysis of Collective Decision-Making
D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Alberto Bisin & Piero Gottardi, 2005. "Efficient Competitive Equilibria with Adverse Selection," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  2. Greenberg, Joseph, 1979. "Consistent Majority Rules over Compact Sets of Alternatives," Econometrica, Econometric Society, vol. 47(3), pages 627-36, May. [Downloadable!] (restricted)
  3. 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, vol. 90(4), pages 630-49, November.
  4. CRES, Herve & TVEDE, Mich, 2001. "Voting in assemblies of shareholders and incomplete markets," Les Cahiers de Recherche 722, HEC Paris. [Downloadable!]
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  5. Prescott, Edward C & Townsend, Robert M, 1984. "Pareto Optima and Competitive Equilibria with Adverse Selection and Moral Hazard," Econometrica, Econometric Society, vol. 52(1), pages 21-45, January. [Downloadable!] (restricted)
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