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| Name | Asymmetric Information and Adverse selection, Problems of individual insurance? |
| Video Uploader | Video From Insurance help |
| Upload Date | This Video Uploaded At 16-06-2016 10:24:10 |
| Video Discription | Asymmetric Information and Adverse selection Introduction Economics 306 – build models of individual, firm and market behavior Most models assume actors fully informed about the market specifics Know prices, incomes, market demand, etc. However, many markets do not have this degree of information Look at the role of ‘imperfect information’ This is more than just ‘uncertainty’ – we’ve already dealt with that issue Problem of asymmetric information Parties on the opposite side of a transaction have different amounts of information Health care ripe w/ problems of asymmetric information Patients know their risks, insurance companies may not Doctors understand the proper treatments, patients may not Problem of individual insurance Consider situation where people can purchase individual health insurance policy Problem for insurance companies They do not know who has the highest risk of expenditures People themselves have an idea whether they are a high risk person Asymmetric information Can lead to poor performance in the private insurance market Demonstrate in simple numeric example the problem of ‘adverse selection’ Definition: those purchasing insurance are a non-representative portion of the population This section Outline problem of asymmetric information and adverse selection Focus on How selection can impact market outcomes ‘How much’ adverse selection is in the market Give some examples How can get around Why EPHI might help solve AI/AS Focus in this chapter will be on the consumer side – how their information alters insurance markets Are some other examples How doctors’ asymmetric information might alter procedure Will save for another time Keep focused on insurance Market for Lemons Nice simple mathematical example of how asymmetric information AI can force markets to unravel Attributed to George Akeloff, Nobel Prize a few years ago Good starting point for this analysis, although it does not deal with insuance Problem Setup Market for used cars Sellers know exact quality of the cars they sell Buyers can only identify the quality by purchasing the good Buyer beware: cannot get your $ back if you buy a bad car Two types of cars: high and low quality High quality cars are worth $20,000, low are worth $2000 Suppose that people know that in the population of used cars that ½ are high quality Already a strong unrealistic assumption One that is not likely satisfied Buyers do not know the quality of the product until they purchase How much are they willing to pay? Expected value 1/2$20K + 1/2$2K $11K People are willing to pay $11K for an automobile Would $11K be the equilibrium price? Who is willing to sell an automobile at $11K High quality owner has $20K auto Low quality owner has $2K Only low quality owners enter the market Suppose you are a buyer, you pay $11K for an auto and you get a lemon, what would you do? Sell it for on the market for $11K Eventually what will happen? Low quality cars will drive out high quality Equilibrium price will fall to $2000 Only low quality cars will be sold Some solutions? Deals can offer money back guarantees Does not solve the asymmetric info problem, but treats the downside risk of asy. Info Buyers can take to a garage for an inspection Can solve some of the asymmetric information problem Insurance Example All people have $50k income income When health shock hits, all lose $20,000 Two groups Group one has probability of loss of 10% Group two has probability of loss of 70% Key assumption: people know their type EIncome1 0.950K + 0.130K$48K EIncome2 0.350K + 0.730K$36K Suppose uY0.5 Easy to show that EU1 .950K0.5 + .130K0.5 218.6 EU2 .350K0.5 + .730K0.5 188.3 What are these groups willing to pay for insurance? Insurance will leave them with the same income in both states of the world In the good state, have income Y, pay premium Prem, UY-Prem0.5 In the bad state, have income Y, pay premium P, experience loss L, receive check from insurance for L Uw/insurance Y-Prem0.5 Group 1: Certain income that leaves them as well off as if they had no insurance U Y-Prem0.5 218.6, so Y-Prem 218.62 $47,771 Group 2: same deal U Y-Prem0.5 188.3, so Y-Prem 188.32 $35,467 |
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