Lecture 4

Question 1

What is a social insurance?

Answer 1

for general welfare

in U.S: immer mehr für HR (health care, pension, etc.) und less defense
immer mehr in EDUCATION, Income security, Health

Insurance is a promise to make some payment in case of a particular event, in exchange for a payment, called a premium.

Question 2

Which insurance programs exist?

Answer 2

1. Social insurance programs: Government interventions in the provision of insurance against adverse events. (entitlement to benefits; muss nicht überprüft werden, large Part of pop. covered)
   * For most programs, eligibility (Berechtig sein) is not means-tested.
2. Means-tested (Fürsorge): Refers to programs in which eligibility depends on the level of one’s current income or assets.
   on case-by-case basis; status based => has to be tested; is not entitled

Question 3

What are insurance premiums? => Beitrag

Answer 3

Money that is paid to an insurer so that an individual will be insured
against adverse events

in U.S.: health insurance, auto insurance, life insurance, property insurance ( annually: 1,56 trillion $)

Question 4

What is consumption smoothing? / Why insurance important?

Answer 4

Valuable bc it helps individuals´ insurance consumption:
Consumption smoothing:
The translation of consumption from periods when consumption is high, and
thus has low marginal utility, to periods when consumption is low, and thus has high marginal utility.
Always a moderate amount of consumption for sure is better than a 50–50 chance of having a lot or
nothing.
* Individuals will demand full insurance in order to fully smooth their consumption across states of the world (damit egal ist, was passiert)

States of the world: set of outcomes that are possible in a certain future

Question 5

What is the expected utility model?

Answer 5

Expected utility model: The weighted sum of utilities across states of the world, where the weights are
the probabilities of each state occurring => welcher Unfall wie wahrscheinlich

Suppose an adverse event occurs with probability 𝑝𝑝.
Expected utility is 𝐸𝐸𝑈𝑈=(1−𝑝𝑝)×𝑈𝑈(consumption with no adverse event)+𝑝𝑝×𝑈𝑈(consumption with adverse event)

lotto: wslk. gewinn =1,20€
kosten = 2 €
= 80ct Verlust pro Los

Question 6

The Role of Risk aversion in Insurance

Answer 6

Risk aversion: The extent to which individuals are willing to bear risk.
* Risk-averse people may still want to buy some insurance even if it is not actuarially fair.
People may differ in their risk aversion, and if insurance premiums are extremely unfair, then only the most risk averse will want it.

ppl paying extra to be insured (even if utility is not highest) weil risk averse

Question 7

What is Information Asymetry?

Answer 7

Information asymmetry: The difference in information that is available to sellers and to purchasers in a market.
In the insurance market, buyers may know more about their insurable risks than the seller (insurer) does. (Ich weiß, wie es mir geht, meine versicherung nicht)
car market: selles know more than buyers

Question 8

What is Adverse Selection?

Answer 8

The fact that insured individuals know more about their risk level than does the insurer might cause those most likely to have the adverse outcome to select insurance, leading insurers to lose money if they offer insurance.
=>schlecht für Versicherung

selling to both requires that low-risk people subsidize high-risk people (low mögen das aber nicht=> nachmal nur high-risk versichert)

Question 9

What is Information Asymmetry?

Answer 9

Information asymmetry: The difference in information that is available to sellers and to
purchasers in a market.
In the insurance market, buyers may know more about their insurable risks than the seller (insurer) does

versicherung müsste alle Info haben und dann separiert bepreisen

Question 10

Does Asymetric Info necessarily lead to market failure?

Answer 10

If low-risk people have a high enough risk premium, they will subsidize high-risk people in a pooling
equilibrium.

Question 11

What is Risk Premium?

Answer 11

The amount that risk-averse individuals will pay for insurance above and beyond the
actuarially fair price.

Question 12

What is pooling Equilibrium?

Answer 12

A market equilibrium in which all types of people buy full insurance even though it is
not fairly priced to all individuals

Question 13

What is a seperating equilibrium?

Answer 13

A market equilibrium in which different types of people buy different kinds of
insurance products designed to reveal their true types.

Question 14

Other reasons other than adverse selection that the goverment should intervene in the market?

Answer 14

Externalities: Vaccines have positive spillovers, car crashes negative ones.
* Administrative costs: Government-run Medicare 90% has much lower administrative costs than private insurance 10%.
* Redistribution: Governments may want to redistribute from the healthy to the sick.
* Paternalism (Bevormundung): Governments may feel that people would choose to buy too little insurance for themselves.
* irrational agents and lazy choice makers

Question 15

What is the samaritans dilema?
Begründung für Eingreifen

Answer 15

Compassionate governments want to help hard-hit citizens.
* But, knowing this, citizens may not buy insurance, making bailouts expensive. (hope that society is taking care of them)
* This is especially important for floods

Question 16

What is Self Insurance?

Answer 16

The private means of smoothing consumption over adverse events, such as through one’s own savings, the labor supply of family members, or borrowing from friends.

Implicit contract within private circle (zb when krank zahlt papa ticket heim)

Soziales System in Nord-Mazedonien auf dem Land

Question 17

How can people insure themselves against unemployment?

Answer 17

They can draw on their own savings. => Gespartes Nutzen
* They can borrow in collateralized forms (such as borrowing against the equity they have in their
homes) or uncollateralized forms (such as on their credit card).
* Other family members can increase their labor earnings.
* They can receive transfers from their extended family, friends, or local organizations.

They MARRY

Question 18

How much self-insurance is in place determines how effective social insurance is.
What 3 different things can happen?

Answer 18

OHNE EIGENSCHUTZ: For an individual with no self-insurance, each dollar of unemployment insurance (UI) goes directlyto reducing the decline in consumption from unemployment.
no crowd-out
Alles was ich aus dem Alo Geld bekomme, geht direkt in den Konsum den ich sonst mit mienem Arbeitsgeld zahlen will; =SWchadensbegrenzung

For an individual with complete self-insurance, each dollar of UI replaces a dollar of selfinsurance.
* complete crowd-out
Alles was ich an Alogeld bekomme muss ich weniger von meinem eigenen gesparten zahlen

For an individual with partial self-insurance, each dollar is split between smoothing consumption
and reducing self-insurance.
* partial crowd-out

Question 19

The importance of social insurance for consumption smoothing will depend on two factors?

Answer 19

Predictability of the event: It is easier for people to self-insure against a predictable event, such as increasing their savings. More predictable risks reduce the benefits of providing social insurance. (Rente) man kann einfacher/billiger selbst drauf ovrbereiten

Cost of the event: It is more difficult to self-insure against high-cost events, such as becoming injured and unable to work. Costly risks increase the benefits of providing social insurance (Arbeitsunfall) => lohnt sich mehr in Krankenkasse zu gehen => Krebbehandlung zb wäre sehr teuer ohne versicherung

Question 20

Definition of Moral Hazard

Answer 20

subjektives Risikio

Adverse actions taken by individuals or producers in response to insurance against adverse outcomes.
nichts ermutigt die sünde so sehr wie die Barmherzigkeit

not optimal for government to provide full insurance, da:
“bin ja eh versichert”

Question 21

Examples of Moral hazard

Answer 21

Tuna fisherman Paul Hebert
* Claimed a physical disability. Accepted $44,000 in Social Security over four years, two of which
were spent on the reality TV show Wicked Tuna, which required heavy physical labor.
* Construction worker Donald Ray Simmons Jr.
* Claimed a severe arm injury. Received $52,000 in insurance payments before investigators
discovered he was working as a tandem skydiving instructor.
* Office worker Sheyla Veronica White
* Hit herself on the head with a sprinkler that fell near her desk. She subsequently claimed that it
had fallen directly on her and filed a workers’ compensation claim. The whole episode was caught
on tape

Question 22

What 2 things determine Moral Hazard?

Answer 22

How easy it is to observe whether the adverse event has happened => nachvollziehbar?
How easy it is to change behavior to establish the adverse event.

Question 23

In examining the effects of social insurance, four types of moral hazard play a particularly important role.

Answer 23

Ex-Ante Moral Hazard:
Reduced precaution against entering the adverse state.
Because you have medical insurance, you reduce preventive activities to protect your health.

Increased odds of entering the adverse state.
Because you have workers’ compensation, you are more likely to claim that you were injured on the job. => schneller “verletzt”

Ex-post Moral Hazard:
Increased expenditures when in the adverse state.
Because you have medical insurance, you use more medical care =>2nd and 3rd doctor
Supplier responses to insurance against the adverse state.
Because you have workers’ compensation, firms aren’t as careful about protecting you against workplace accidents. => weniger Schutzmaßnahmen bei der Arbeit

The adverse behavior encouraged by insurance lowers social efficiency because it reduces the provisions of a socially efficient labor supply.

• When social insurance encourages adverse events, which raise the cost of the social insurance program, it increases taxes and lowers social efficiency further => doppelt schlecht

Question 24

In conclusion Optimal Social Insurance

Answer 24

NUR TEILWEISE VERSICHERN
Optimal social insurance systems should partially, but not completely, insure individuals against adverse
events.
The benefit of social insurance is the amount of consumption smoothing provided by social insurance programs. => der Vorteil einer Sozialversicherung ist die Höhe der consumption smoothing durch die soz. versicherungsprogramme
The cost of social insurance is the moral hazard caused by insuring against adverse events. => die Kosten der soz. Versicherungen ist subjektives Risiko verursacht durch das Versichern ggü. schlechten Sachen

Question 25

Asymetric information in insurance has 2 important implications

Answer 25

It can cause adverse selection.
It can cause moral hazard.

ironic feature: simultaneously motivates and undercuts the rationle for gov. intervention through social insurance.

Question 26

Experience rated premium

Answer 26

charging a price for insurance that is a function of realized outcomes