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The Political Economy of a Publicly Provided Private Good with Adverse Selection

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  • Sophia Delipalla

    ()

  • Owen O'Donnell

    ()

Abstract

Given heterogeneity in incomes and health risks, with asymmetric information in the latter, preferences over the public-private mix in health insurance and care are derived. Results concerning crowding-out in the presence of adverse selection are established. For low-risk individuals, crowding-out depends on risk aversion. A set of such individuals prefers a mixed public-private health care system. A majority-voting equilibrium exists. Under weak assumptions about the income distribution and tax function, both public and private sectors exist in the equilibrium. Comparing information regimes, public provision is more likely to be positive, and will not be lower, under asymmetric information. In the presence of asymmetric information, the equilibrium is more complicated than the "ends-against-the-middle" variety derived elsewhere in the literature.

Suggested Citation

  • Sophia Delipalla & Owen O'Donnell, 1999. "The Political Economy of a Publicly Provided Private Good with Adverse Selection," Studies in Economics 9911, School of Economics, University of Kent.
  • Handle: RePEc:ukc:ukcedp:9911
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    References listed on IDEAS

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    1. Blomquist, Soren & Christiansen, Vidar, 1999. "The political economy of publicly provided private goods," Journal of Public Economics, Elsevier, vol. 73(1), pages 31-54, July.
    2. B. Dahlby, 1981. "Adverse selection and Pareto improvements through compulsory insurance," Public Choice, Springer, vol. 37(3), pages 547-558, January.
    3. Usher, Dan, 1977. "The welfare economics of the socialization of commodities," Journal of Public Economics, Elsevier, vol. 8(2), pages 151-168, October.
    4. Stiglitz, J. E., 1974. "The demand for education in public and private school systems," Journal of Public Economics, Elsevier, vol. 3(4), pages 349-385, November.
    5. Epple, Dennis & Romano, Richard E, 1996. "Public Provision of Private Goods," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 57-84, February.
    6. Robert Spann, 1974. "Collective consumption of private goods," Public Choice, Springer, vol. 20(1), pages 63-81, December.
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    8. Epple, Dennis & Romano, Richard E., 1996. "Ends against the middle: Determining public service provision when there are private alternatives," Journal of Public Economics, Elsevier, vol. 62(3), pages 297-325, November.
    9. Wilson, Charles, 1977. "A model of insurance markets with incomplete information," Journal of Economic Theory, Elsevier, vol. 16(2), pages 167-207, December.
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    12. James Buchanan, 1970. "Notes for an Economic theory of socialism," Public Choice, Springer, vol. 8(1), pages 29-43, March.
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    Cited by:

    1. Pau Olivella & Marcos Vera-Hernandez, 2006. "Testing for adverse selection into private medical insurance," IFS Working Papers W06/02, Institute for Fiscal Studies.

    More about this item

    Keywords

    Public provision of private goods; health insurance; health care; adverse selection; public choice;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
    • H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government

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