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Adverse selection in disability insurance; empirical evidence for Dutch firms

  • Anja Deelen

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    In this paper, we analyse the employers' decision to opt out of the public disability insurance (DI) system. For the empirical analysis we use an extensive panel of Dutch employers for the period 2000-2002. We find that cross-subsidies employers pay or receive under the current public insurance system of experience rating contribute to the opting out decision. Since cross-subsidies are risk related, this is an indication for the presence of adverse selection: high risk (cross-subsidised) firms tend to remain publicly insured, while low risk (cross subsidising) firms tend to opt out. This finding is supported by the fact that risk related characteristics such as the sector of industry and the composition of the work force by age and gender contribute to the explanation of the opting-out decision. Adverse selection could be diminished by setting public premiums in such a way that they are more actuarial fair in the long run. As a result, the risk profile of firms opting out will become more similar to that of firms not opting out.

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    Paper provided by CPB Netherlands Bureau for Economic Policy Analysis in its series CPB Discussion Paper with number 46.

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    Date of creation: Jun 2005
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    Handle: RePEc:cpb:discus:46
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    1. Bovenberg, A.L. & Besseling, P.J. & de Mooij, R.A., 1998. "Premium differentiation in social insurance," Other publications TiSEM 9d5509a0-ed01-4e8d-8724-8, Tilburg University, School of Economics and Management.
    2. Amy Finkelstein, 2002. "The Interaction of Partial Public Insurance Programs and Residual Private Insurance Markets: Evidence from the U.S. Medicare Program," NBER Working Papers 9031, National Bureau of Economic Research, Inc.
    3. repec:rus:hseeco:16303 is not listed on IDEAS
    4. Jaap H. Abbring & Pierre-André Chiappori & Jean Pinquet, 2003. "Moral Hazard and Dynamic Insurance Data," Journal of the European Economic Association, MIT Press, vol. 1(4), pages 767-820, 06.
    5. Boyer, Marcel & Dionne, Georges, 1989. "An Empirical Analysis of Moral Hazard and Experience Rating," The Review of Economics and Statistics, MIT Press, vol. 71(1), pages 128-34, February.
    6. Pierre-André Chiappori & Bernard Salanié, 1997. "Testing for Asymmetric Information in Insurance Markets," Working Papers 97-11, Centre de Recherche en Economie et Statistique.
    7. Patricia M. Anderson & Bruce D. Meyer, 1994. "The Effects of Unemployment Insurance Taxes and Benefits on Layoffs Using Firm and Individual Data," NBER Working Papers 4960, National Bureau of Economic Research, Inc.
    8. G. Dionne & N. Doherty & N. Fombaron, 2000. "Adverse Selection in Insurance Markets," THEMA Working Papers 2000-21, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    9. P. Koning, 2005. "Estimating the Impact of Experience Rating on the Inflow into Disability Insurance in the Netherlands," Working Papers 05-07, Utrecht School of Economics.
    10. Anderson, Patricia M & Meyer, Bruce D, 1993. "Unemployment Insurance in the United States: Layoff Incentives and Cross Subsidies," Journal of Labor Economics, University of Chicago Press, vol. 11(1), pages S70-95, January.
    11. Robin Boadway & Manuel Leite-Monteiro & Maurice Marchand & Pierre Pestieau, 2006. "Social Insurance and Redistribution with Moral Hazard and Adverse Selection," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(2), pages 279-298, 07.
    12. Laurence J. Kotlikoff & Kent A. Smetters & Jan Walliser, 1998. "Opting Out of Social Security and Adverse Selection," NBER Working Papers 6430, National Bureau of Economic Research, Inc.
    13. Jaap H. Abbring & James J. Heckman & Pierre-André Chiappori & Jean Pinquet, 2003. "Adverse Selection and Moral Hazard In Insurance: Can Dynamic Data Help to Distinguish?," Journal of the European Economic Association, MIT Press, vol. 1(2-3), pages 512-521, 04/05.
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