CHAPTER 10 ADVERSE SELECTION IN REAL MARKETS
CHAPTER 10 ADVERSE SELECTION IN REAL MARKETS
Intro Recall our example:a man walks into the office of a life insurance company. He wants to buy a $1 million life insurance policy for a term of one day.Your company will have to pay $1 million to his heirs if and only if he dies tomorrow. You know nothing else about this man. How much do you charge? Bhattacharya,Hyde and Tu-HealthEconomics
Bhattacharya, Hyde and Tu – Health Economics Intro Recall our example: a man walks into the office of a life insurance company. He wants to buy a $1 million life insurance policy for a term of one day. Your company will have to pay $1 million to his heirs if and only if he dies tomorrow. You know nothing else about this man. How much do you charge?
PREDICTIONS OF ASYMMETRIC INFORMATION MODELS Ch 10|Adverse selection in real markets
Ch 10 | Adverse selection in real markets PREDICTIONS OF ASYMMETRIC INFORMATION MODELS
Asymmetric information models make three predictions about these markets )Positive correlation between risk and coverage 2 Bulk markups 3) Adverse selection death spiral Bhattacharya,Hyde and Tu-HealthEconomics
Bhattacharya, Hyde and Tu – Health Economics Asymmetric information models make three predictions about these markets 1) Positive correlation between risk and coverage 2) Bulk markups 3) Adverse selection death spiral
1)Positive correlation between risk and coverage Recall Rothschild-Stiglitz: Separating equilibrium>high-risk types have full insurance (Q,),low-risk types have incomplete insurance() robust type zero-profit line 22 ------.UE UR frail type zero-profit line Bhattacharya,Hyde and Tu-HealthEconomics
Bhattacharya, Hyde and Tu – Health Economics 1) Positive correlation between risk and coverage Recall Rothschild-Stiglitz: Separating equilibrium→ high-risk types have full insurance (Ω1 ), low-risk types have incomplete insurance (Ω2 )