Public versus Private Insurance with Non-Expected Utility: A Political Economy Argument
AbstractThis paper analyzes the political support for 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. Adopting Yaari's (1987) dual theory to expected utility (i.e., risk aversion without diminishing marginal utility of income), we show that adverse selection on the private insurance market may lead a majority of individuals to prefer public insurance over private insurance, even if the median risk is below the average risk (so that the median actually subsidizes high-risk individuals). We also show that risk aversion makes public insurance more attractive and that the dual theory is less favourable to a mixed insurance system than the expected utility framework. Lastly, we demonstrate how the use of genetic tests may threaten the political viability of public insurance.
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Bibliographic InfoPaper provided by Queen Mary, University of London, School of Economics and Finance in its series Working Papers with number 439.
Date of creation: Oct 2001
Date of revision:
Voting; Insurance; Adverse selection;
Find related papers by JEL classification:
- H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health
This paper has been announced in the following NEP Reports:
- NEP-ALL-2001-10-09 (All new papers)
- NEP-CDM-2001-10-09 (Collective Decision-Making)
- NEP-IAS-2001-10-09 (Insurance Economics)
- NEP-MIC-2001-10-09 (Microeconomics)
- NEP-PBE-2001-10-09 (Public Economics)
- NEP-POL-2001-10-09 (Positive Political Economics)
- NEP-PUB-2001-10-09 (Public Finance)
- NEP-REG-2001-10-09 (Regulation)
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