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Public versus private insurance: a political economy argument

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  • HINDRIKS, Jean

Abstract

This paper analyzes the political support for a 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 to different individual risks. We show that adverse selection on the private insurance market can lead a majority of individuals to prefer public insurance over private insurance, even if the median risk is below theaverage risk (so that the median ends upsubsidizing high-risk individuals). We also show that more risk aversion always leads to a greater political support for public insurance and that a mixture of public and private insurance is politically non sustainable. Lastly, we demonstrate how progressively more powerful information technology may help the private insurance market to mitigate the adverse selection problem and reduce the demand for public insurance threatening its political sustainability.

Suggested Citation

  • HINDRIKS, Jean, 2000. "Public versus private insurance: a political economy argument," CORE Discussion Papers 2000058, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:2000058
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    File URL: https://uclouvain.be/en/research-institutes/immaq/core/dp-2000.html
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    References listed on IDEAS

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    1. Hindriks, Jean & Myles, Gareth D., 2013. "Intermediate Public Economics," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262018691, January.
    2. Coronado Julia Lynn & Fullerton Don & Glass Thomas, 2011. "The Progressivity of Social Security," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-45, November.
    3. Karni, Edi & Zilcha, Itzhak, 1986. "Welfare and comparative statics implications of fair social security : A steady-state analysis," Journal of Public Economics, Elsevier, vol. 30(3), pages 341-357, August.
    4. Helmuth Cremer & Pierre Pestieau, 1996. "Redistributive taxation and social insurance," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 3(3), pages 281-295, July.
    5. 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.
    6. Miguel Gouveia, 1997. "Majority rule and the public provision of a private good," Public Choice, Springer, vol. 93(3), pages 221-244, December.
    7. Eckstein, Zvi & Eichenbaum, Martin & Peled, Dan, 1985. "Uncertain lifetimes and the welfare enhancing properties of annuity markets and social security," Journal of Public Economics, Elsevier, vol. 26(3), pages 303-326, April.
    8. David Miles & Allan Timmermann, 1999. "Risk sharing and transition costs in the reform of pension systems in Europe," Economic Policy, CEPR;CES;MSH, vol. 14(29), pages 251-286, October.
    9. Mailath, George J, 1987. "Incentive Compatibility in Signaling Games with a Continuum of Types," Econometrica, Econometric Society, vol. 55(6), pages 1349-1365, November.
    10. Jean-Charles Rochet, 1991. "Incentives, Redistribution and Social Insurance," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 16(2), pages 143-165, December.
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    More about this item

    Keywords

    voting; insurance; adverse selection.;

    JEL classification:

    • H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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