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When Can Partial Public Insurance Produce Pareto Improvements?

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  • Amy Finkelstein

Abstract

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.

Suggested Citation

  • Amy Finkelstein, 2002. "When Can Partial Public Insurance Produce Pareto Improvements?," NBER Working Papers 9035, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:9035
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    References listed on IDEAS

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    1. 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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    6. Finkelstein, Amy, 2004. "The interaction of partial public insurance programs and residual private insurance markets: evidence from the US Medicare program," Journal of Health Economics, Elsevier, vol. 23(1), pages 1-24, January.
    7. Mark V. Pauly, 1974. "Overinsurance and Public Provision of Insurance: The Roles of Moral Hazard and Adverse Selection," The Quarterly Journal of Economics, Oxford University Press, vol. 88(1), pages 44-62.
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    Cited by:

    1. Finkelstein, Amy, 2004. "The interaction of partial public insurance programs and residual private insurance markets: evidence from the US Medicare program," Journal of Health Economics, Elsevier, vol. 23(1), pages 1-24, January.
    2. Joshua S. Gans & Stephen P. King, 2003. "Anti-insurance: Analysing the Health Insurance System in Australia," The Economic Record, The Economic Society of Australia, vol. 79(247), pages 473-486, December.
    3. Silvia Platoni, 2010. "Asymmetric Information and Annuities," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 12(3), pages 501-532, June.

    More about this item

    JEL classification:

    • H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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