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On the Political Economy of Adverse Selection

Author

Listed:
  • Hervé Crès

    (HEC School of Management)

  • Mich Tvede

    (Department of Economics, University of Copenhagen)

Abstract

We consider a standard insurance economy where consumers are supposed to vote over menus of insurance contracts: A menu of contracts is majority stable if there does not exist another menu which is supported by an appropriate majority of consumers. We compute the smallest level of super majority for which there always exists a stable menu of contracts, and such that all stable menus of contracts are Pareto optimal. Lower super majority voting rules may ensure existence of stable menus if individual states and/or types of consumers are aggregated, but then stable menus of contracts need not be Pareto optimal: hence a trade-off between Pareto optimality and conservativeness of the voting rule is exhibited.

Suggested Citation

  • Hervé Crès & Mich Tvede, 2005. "On the Political Economy of Adverse Selection," Discussion Papers 05-14, University of Copenhagen. Department of Economics, revised Jun 2006.
    • Handle: RePEc:kud:kuiedp:0514
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    JEL classification:

    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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