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The Shifting Shape of Risk: Endogenous Market Failure for Insurance

Listed author(s):
  • Thomas G. Koch

    ()

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

Registered author(s):

    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.

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    File URL: http://www.mdpi.com/2227-9091/5/1/9/pdf
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    File URL: http://www.mdpi.com/2227-9091/5/1/9/
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    Article provided by MDPI, Open Access Journal in its journal Risks.

    Volume (Year): 5 (2017)
    Issue (Month): 1 (January)
    Pages: 1-13

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    Handle: RePEc:gam:jrisks:v:5:y:2017:i:1:p:9-:d:88917
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    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. J. David Cummins, 2006. "Should the government provide insurance for catastrophes?," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 337-380.
    8. 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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