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Adverse Selection in Low-Income Health Insurance Markets: Evidence from a RCT in Pakistan

Author

Listed:
  • Fischer, Torben

    () (University of Mannheim)

  • Frölich, Markus

    () (University of Mannheim)

  • Landmann, Andreas

    () (Paris School of Economics)

Abstract

We present robust evidence on the presence of adverse selection in hospitalization insurance for low-income households. A large randomized control trial from Pakistan allows us to separate adverse selection from moral hazard, to estimate how selection changes at different points of the demand curve and to test simple measures against adverse selection. The results reveal substantial selection in individual policies, leading to welfare losses and the threat of a market breakdown. Bundling insurance policies at the household or higher levels almost eliminates adverse selection, thus mitigating its welfare consequences and creating the possibility for sustainable insurance supply.

Suggested Citation

  • Fischer, Torben & Frölich, Markus & Landmann, Andreas, 2018. "Adverse Selection in Low-Income Health Insurance Markets: Evidence from a RCT in Pakistan," IZA Discussion Papers 11751, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp11751
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    References listed on IDEAS

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    1. repec:taf:jdevst:v:54:y:2018:i:6:p:1002-1018 is not listed on IDEAS
    2. Dror, David M. & Soriano, Elmer S. & Lorenzo, Marilyn E. & Sarol, Jesus Jr. & Azcuna, Rosebelle S. & Koren, Ruth, 2005. "Field based evidence of enhanced healthcare utilization among persons insured by micro health insurance units in Philippines," Health Policy, Elsevier, vol. 73(3), pages 263-271, September.
    3. Michael Rothschild & Joseph Stiglitz, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, Oxford University Press, vol. 90(4), pages 629-649.
    4. Zhang, Licheng & Wang, Hong, 2008. "Dynamic process of adverse selection: Evidence from a subsidized community-based health insurance in rural China," Social Science & Medicine, Elsevier, vol. 67(7), pages 1173-1182, October.
    5. Alma Cohen & Peter Siegelman, 2010. "Testing for Adverse Selection in Insurance Markets," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(1), pages 39-84.
    6. Liran Einav & Amy Finkelstein, 2011. "Selection in Insurance Markets: Theory and Empirics in Pictures," Journal of Economic Perspectives, American Economic Association, vol. 25(1), pages 115-138, Winter.
    7. Amy Finkelstein & Nathaniel Hendren & Mark Shepard, 2017. "Subsidizing Health Insurance for Low-Income Adults: Evidence from Massachusetts," NBER Working Papers 23668, National Bureau of Economic Research, Inc.
    8. Abhijit Banerjee & Esther Duflo & Richard Hornbeck, 2014. "Bundling Health Insurance and Microfinance in India: There Cannot Be Adverse Selection If There Is No Demand," American Economic Review, American Economic Association, vol. 104(5), pages 291-297, May.
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    12. Landmann, Andreas & Frölich, Markus, 2015. "Can health-insurance help prevent child labor? An impact evaluation from Pakistan," Journal of Health Economics, Elsevier, vol. 39(C), pages 51-59.
    13. repec:wsi:jdexxx:v:16:y:2011:i:04:n:s1084946711001926 is not listed on IDEAS
    14. Martin B. Hackmann & Jonathan T. Kolstad & Amanda E. Kowalski, 2012. "Health Reform, Health Insurance, and Selection: Estimating Selection into Health Insurance Using the Massachusetts Health Reform," American Economic Review, American Economic Association, vol. 102(3), pages 498-501, May.
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    More about this item

    Keywords

    adverse selection; health insurance; Pakistan;

    JEL classification:

    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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