Lecture 5 - Information Flashcards
Who will choose large deductible (share paid by the insuree before the insurance pays)?
- Less risk-averse individuals (risk-averse individuals want to insure everything)
- better-off individuals (paying for small costs is okay)
- low-risk individuals
Results of adverse selection in insurance market
- no pooling eq (cream-skimming is possible)
- no full insurance for both types
- separating eq can exist with full insurance for high-risk people but not for low-risk (as in EI)
Benefits of private insurance over public insurance
- Sharper incentives for productive efficiency and innovation
- variety of offering is easier
Contracting out of public insurance
Not sustainable as there would be self-selection, eg. for unemployment insurance, low-risk people stand to gain more from contracting out, which would leave the state with only bad risks to insurance
Ways to control moral hazard (in insurance)
- deductibles and co-insurance
- better info and monitoring (eg. monitoring devices in cars)
- rationing on the basis of assessment of need (not allowing everything)
Public vs. private sector in handling MH
- private sector can’t sustain huge losses indefinitely
- may be economies of scale in gathering info, probably favouring the state
- arbitrary rationing of entitlements may be more acceptable if made by the state instead of a profit-motivated private insurer
Controlling MH in P-A relationships
The idea is to align interests of P and A:
- bonuses for senior managers based on profits or other targets
- sales commissions
- shares to employees
- > formally: incentive compatible contract
Why are some of the mechanisms used in the private sector to reduce MH in P-A relationships less effective in the public sector?
Because some dimensions of output cannot be easily measured, unlike profits in the private sector
Measuring government output
Some measures may distort behaviour:
- surgeon refusing to take on difficult cases that risk worsening his average performance
- school performance incentives may encourage selection of students, exclusion of difficult ones, focus on exam prep rather than broader aspects of education, etc.
- > professional ethos may be more effective at maintaining quality than incentive pay
Some strategies used to improve public sector performance
- monitoring by public sector audit agencies
- budget based on performance
- incentives and bonuses for individual staff
- decentralisation -> yardstick competition
- contracting-out (to private sector)
- consumer pressure by making info on performance public
- privatisation