Lecture 5 - Information Flashcards

1
Q

Who will choose large deductible (share paid by the insuree before the insurance pays)?

A
  • Less risk-averse individuals (risk-averse individuals want to insure everything)
  • better-off individuals (paying for small costs is okay)
  • low-risk individuals
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2
Q

Results of adverse selection in insurance market

A
  • 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)
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3
Q

Benefits of private insurance over public insurance

A
  • Sharper incentives for productive efficiency and innovation
  • variety of offering is easier
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4
Q

Contracting out of public insurance

A

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

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5
Q

Ways to control moral hazard (in insurance)

A
  • deductibles and co-insurance
  • better info and monitoring (eg. monitoring devices in cars)
  • rationing on the basis of assessment of need (not allowing everything)
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6
Q

Public vs. private sector in handling MH

A
  • 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
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7
Q

Controlling MH in P-A relationships

A

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
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8
Q

Why are some of the mechanisms used in the private sector to reduce MH in P-A relationships less effective in the public sector?

A

Because some dimensions of output cannot be easily measured, unlike profits in the private sector

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9
Q

Measuring government output

A

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
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10
Q

Some strategies used to improve public sector performance

A
  • 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
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