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When Can Partial Public Insurance Produce Pareto Improvements?

  • Amy Finkelstein

Wilson (1977) provided the striking result that the government can always Pareto dominate a pooling equilibrium in a private insurance market with adverse selection by providing the pooling policy as a compulsory public policy and allowing individuals to buy supplementary private insurance. I show that this Pareto improving role for the government does not derive from its unique capacity to compel participation in a public insurance program. Rather, it stems from the fact that, with the introduction of the public policy, individuals may now hold multiple insurance policies: one public and one private. If, instead, we relax the assumption of the Wilson model that individuals may only hold one private insurance policy, the private market equilibrium is always second best Pareto efficient and there is no possibility of Pareto improvement through government intervention. Whether in fact individuals are restricted to purchasing only one private insurance policy - and hence whether there is scope for Pareto improvement through government policy in this model - varies in a predictable manner across different insurance markets.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9035.

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Date of creation: Jun 2002
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Handle: RePEc:nbr:nberwo:9035
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  1. Crocker, Keith J. & Snow, Arthur, 1985. "The efficiency of competitive equilibria in insurance markets with asymmetric information," Journal of Public Economics, Elsevier, vol. 26(2), pages 207-219, March.
  2. Eichenbaum, Martin S & Peled, Dan, 1987. "Capital Accumulation and Annuities in an Adverse Selection Economy," Journal of Political Economy, University of Chicago Press, vol. 95(2), pages 334-54, April.
  3. 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.
  4. Wilson, Charles, 1977. "A model of insurance markets with incomplete information," Journal of Economic Theory, Elsevier, vol. 16(2), pages 167-207, December.
  5. Roger Feldman & Carlos Escribano & Laura Pellisé, 1998. "The role of government in health insurance markets with adverse selection," Health Economics, John Wiley & Sons, Ltd., vol. 7(8), pages 659-670.
  6. Spence, Michael, 1978. "Product differentiation and performance in insurance markets," Journal of Public Economics, Elsevier, vol. 10(3), pages 427-447, December.
  7. Riley, John G, 1979. "Informational Equilibrium," Econometrica, Econometric Society, vol. 47(2), pages 331-59, March.
  8. 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.
  9. John Cawley & Tomas Philipson, 1996. "An Empirical Examination of Information Barriers to Trade in Insurance," NBER Working Papers 5669, National Bureau of Economic Research, Inc.
  10. Hajime Miyazaki, 1977. "The Rat Race and Internal Labor Markets," Bell Journal of Economics, The RAND Corporation, vol. 8(2), pages 394-418, Autumn.
  11. Neudeck, Werner & Podczeck, Konrad, 1996. "Adverse selection and regulation in health insurance markets," Journal of Health Economics, Elsevier, vol. 15(4), pages 387-408, August.
  12. Pauly, Mark V, 1974. "Overinsurance and Public Provision of Insurance: The Roles of Moral Hazard and Adverse Selection," The Quarterly Journal of Economics, MIT Press, vol. 88(1), pages 44-62, February.
  13. Amy Finkelstein & James Poterba, 2004. "Adverse Selection in Insurance Markets: Policyholder Evidence from the U.K. Annuity Market," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 183-208, February.
  14. Tomas J. Philipson & Gary S. Becker, 1998. "Old-Age Longevity and Mortality-Contingent Claims," Journal of Political Economy, University of Chicago Press, vol. 106(3), pages 551-573, June.
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