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The Political Economy of a Publicly Provided Private Good with Adverse Selection

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  • Sophia Delipalla

    ()

  • Owen O'Donnell

    ()

Abstract

Given heterogeneity in incomes and health risks, with asymmetric information in the latter, preferences over the public-private mix in health insurance and care are derived. Results concerning crowding-out in the presence of adverse selection are established. For low-risk individuals, crowding-out depends on risk aversion. A set of such individuals prefers a mixed public-private health care system. A majority-voting equilibrium exists. Under weak assumptions about the income distribution and tax function, both public and private sectors exist in the equilibrium. Comparing information regimes, public provision is more likely to be positive, and will not be lower, under asymmetric information. In the presence of asymmetric information, the equilibrium is more complicated than the "ends-against-the-middle" variety derived elsewhere in the literature.

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File URL: ftp://ftp.ukc.ac.uk/pub/ejr/RePEc/ukc/ukcedp/9911.pdf
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Bibliographic Info

Paper provided by Department of Economics, University of Kent in its series Studies in Economics with number 9911.

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Date of creation: Oct 1999
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Handle: RePEc:ukc:ukcedp:9911

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Postal: Department of Economics, University of Kent at Canterbury, Canterbury, Kent, CT2 7NP
Phone: +44 (0)1227 764000
Fax: +44 (0)1227 827850
Web page: http://www.ukc.ac.uk/economics/

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Keywords: Public provision of private goods; health insurance; health care; adverse selection; public choice;

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References

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  1. Robert Spann, 1974. "Collective consumption of private goods," Public Choice, Springer, vol. 20(1), pages 63-81, December.
  2. Stiglitz, J. E., 1974. "The demand for education in public and private school systems," Journal of Public Economics, Elsevier, vol. 3(4), pages 349-385, November.
  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. Spence, Michael, 1978. "Product differentiation and performance in insurance markets," Journal of Public Economics, Elsevier, vol. 10(3), pages 427-447, December.
  5. Epple, Dennis & Romano, Richard E., 1996. "Ends against the middle: Determining public service provision when there are private alternatives," Journal of Public Economics, Elsevier, vol. 62(3), pages 297-325, November.
  6. 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.
  7. Wilson, L. S. & Katz, Michael L., 1983. "The socialization of commodities," Journal of Public Economics, Elsevier, vol. 20(3), pages 347-356, April.
  8. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
  9. James Buchanan, 1970. "Notes for an Economic theory of socialism," Public Choice, Springer, vol. 8(1), pages 29-43, March.
  10. Wilson, Charles, 1977. "A model of insurance markets with incomplete information," Journal of Economic Theory, Elsevier, vol. 16(2), pages 167-207, December.
  11. Dan Usher, 1976. "The Welfare Economics of the Socialization of Commodities," Working Papers 218, Queen's University, Department of Economics.
  12. Blomquist, Sören & Christiansen, Vidar, 1998. "The Political Economy of Publicly Provided Private Goods," Working Paper Series 1998:14, Uppsala University, Department of Economics.
  13. Miguel Gouveia, 1997. "Majority rule and the public provision of a private good," Public Choice, Springer, vol. 93(3), pages 221-244, December.
  14. B. Dahlby, 1981. "Adverse selection and Pareto improvements through compulsory insurance," Public Choice, Springer, vol. 37(3), pages 547-558, January.
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Cited by:
  1. Pau Olivella & Marcos Vera-Hernandez, 2006. "Testing for adverse selection into private medical insurance," IFS Working Papers W06/02, Institute for Fiscal Studies.

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