2_1_07 - Review: Insurance Idea of risk aversion in money....

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Review: Insurance Idea of risk aversion in money. Not dislike of risk, but Declining marginal utility of income. Provides one reason to have insurance. Moral hazard reason not to have it Since insurance creates an externality Which leads to inefficient choices But also a reason to have it, since Sometimes insurer can control risk better Put the incentive where it does the most good. Insurance company vs big firm with lots of factories. Or to control adverse selection. Auto repairs. Adverse selection Assymetric information means that Some worthwhile transactions don’t happen Can’t sell a cream puff
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Coinsurance Insure the factory for 70% of value I get most of the risk aversion gain, and … Still have an incentive to take at least the most useful precautions I.e. the ones where benefit >>cost More generally, the least bad solution Might be to give each party some of the incentive So that each will take those precautions that have a large benefit/cost ratio Less inefficiency from failing to take precautions that are only barely worth taking Arguably, that’s how tort law works Despite the bumper sticker Few of us actually want to be run into
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With nobody testing Genetic risk is insurable. Residual risk is insurable, but … You cannot know genetic risk and take precautions If you can test, insurer can require test Genetic risk is not insurable Residual risk is, and you can know If you can test, insurer can’t Adverse selection may eliminate the insurance market For all save the ones with the worst genes Who can still insure against residual risk If you can test but the fact you did is public Insure against genetic risk before testing
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This note was uploaded on 11/12/2010 for the course BUS 3213 taught by Professor Killer during the Spring '08 term at Buffalo State.

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2_1_07 - Review: Insurance Idea of risk aversion in money....

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