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The Shifting Shape of Risk: Endogenous Market Failure for Insurance


  • Thomas G. Koch

    () (Bureau of Economics, Federal Trade Commission, Washington, DC 20580, USA)


This article considers an economy where risk is insurable, but selection determines the pool of individuals who take it up. First, we demonstrate that the comparative statics of these economies do not necessarily depend on its marginal selection (adverse versus favorable), but rather other characteristics. We then use repeated cross-sections of medical expenditures in the U.S. to understand the role of changes in the medical risk distribution on the fraction of Americans without medical insurance. We find that both the level and the shape of the distribution of risk are important in determining the equilibrium quantity of insurance. Symmetric changes in risk (e.g., shifts in the price of medical care) better explain the shifting insurance rate over time. Asymmetric changes (e.g., associated with a shifting age distribution) are not as important.

Suggested Citation

  • Thomas G. Koch, 2017. "The Shifting Shape of Risk: Endogenous Market Failure for Insurance," Risks, MDPI, Open Access Journal, vol. 5(1), pages 1-13, January.
  • Handle: RePEc:gam:jrisks:v:5:y:2017:i:1:p:9-:d:88917

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    References listed on IDEAS

    1. Alma Cohen & Liran Einav, 2007. "Estimating Risk Preferences from Deductible Choice," American Economic Review, American Economic Association, vol. 97(3), pages 745-788, June.
    2. Charpentier, Arthur & Le Maux, Benoît, 2014. "Natural catastrophe insurance: How should the government intervene?," Journal of Public Economics, Elsevier, vol. 115(C), pages 1-17.
    3. repec:hal:journl:hal-00536925 is not listed on IDEAS
    4. Jonathan Gruber & Helen Levy, 2009. "The Evolution of Medical Spending Risk," Journal of Economic Perspectives, American Economic Association, vol. 23(4), pages 25-48, Fall.
    5. Boyan Jovanovic, 1982. "Favorable Selection with Asymmetric Information," The Quarterly Journal of Economics, Oxford University Press, vol. 97(3), pages 535-539.
    6. Carl M. Harris, 1968. "The Pareto Distribution as a Queue Service Discipline," Operations Research, INFORMS, vol. 16(2), pages 307-313, April.
    7. Carolyn Kousky & Roger Cooke, 2012. "Explaining the Failure to Insure Catastrophic Risks," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 37(2), pages 206-227, April.
    8. J. David Cummins, 2006. "Should the government provide insurance for catastrophes?," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 337-380.
    9. Thomas G. Koch, 2014. "Bankruptcy, Medical Insurance, And A Law With Unintended Consequences," Health Economics, John Wiley & Sons, Ltd., vol. 23(11), pages 1326-1339, November.
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    More about this item


    risk sharing; medical insurance; adverse selection;

    JEL classification:

    • C - Mathematical and Quantitative Methods
    • G0 - Financial Economics - - General
    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance
    • M2 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics
    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting
    • K2 - Law and Economics - - Regulation and Business Law


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