Lecture 5 - 2017.pdf - Applied Health Economics Lecture 5...

Info icon This preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
17/11/2017 1 Applied Health Economics Lecture 5: Adverse Selection II Christopher J Gerry Centre for Health Economics, Management and Policy 18 th November 2017 [email protected] The Rothschild-Stiglitz Model So far then we have looked separately at: Demand for insurance Risk aversion but no information asymmetry Akerlof’s market for lemons Information asymmetry but no risk aversion The Rothschild-Stiglitz Model (1976) puts these two together by introducing the I H -I S space.
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
17/11/2017 2 I H -I S space Recall the income-utility space from lecture 4 Take H E and S E points and bundle them to one point E (endowment point) in I H -I S space Point E shows the income of an individual in both the healthy and the sick state I H I H -I S space Take H C and S C as points that represent a partial insurance contract Point C represents a partial insurance contract Horizontal shift = premium (r) and Vertical shift = payout if sick (q-r)
Image of page 2
17/11/2017 3 I H -I S space Given C 1 , C 2 , C 3 , C 4 , and endowment point E we can make some assumptions: Individual prefers C 2 to C 1 Prefers C 1 to C 3 Cannot compare preference between C 1 to C 4 Cannot compare preferences to E Indifference curves in I H -I S space 1) Downward sloping Willing to give up income in one state if compensated for more income in the other state 2) Convex More downward-sloping at low levels of I H but flatter at high levels I S and I H are imperfect substitutes Result of risk aversion
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
17/11/2017 4 The full insurance line The 45% line is the full- insurance line Why? Any point on this line represents a full insurance contract. State independence The zero-profit line Represents the set of contracts such that the premium is exactly the same as the expected payout (no profits for insurance company) Zero-profit line runs through endowment point E And has a slope that depends on the probability of sickness Also can be thought of as the actuarially-fair line
Image of page 4
17/11/2017 5 The zero-profit line divides I H -I S space into profitable and unprofitable zones C 1 C 2 C 3 all have same healthy state income, so premiums same, pay-outs not C 1 lies below the zero-profit line and results in profits for insurance companies C 3 lies above the zero-profit line and results in a loss of money for companies No company will offer points above zero-
Image of page 5

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern