Unformatted text preview: ange your behavior when the consequences for the behavior are reduced by insurance (because insurer can't easily observe your behavior) E.g. Have riskier lifestyle or go to the doctor unnecessarily when you have health insurance Adverse Selec1on and the Lemon's Principle Lemon's Principle: When there is asymmetric informa1on, the bad drives out the good (Akerlof's (1970) used-car market paper) Health insurance example: When insurance companies can't determine your health, they assume average health and charge appropriate premium That premium will be too high for those in good health Only those in poor health will buy policies and insurance company will lose money, charge higher premium Higher premium will chase away the healthiest group again Unhealthy drives out the healthy adverse selec1on into health insurance 2 Adverse selec1on leads to inefficient outcomes High quality items not sold, customers can only buy low quality items, may lose consumer surplus because didn't know it was low quality Healthy people choose to be uninsured so they lose the benefit of reducing their risk; only unhealthy people insure...
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This note was uploaded on 01/18/2012 for the course PADP 6950 taught by Professor Fergi during the Spring '11 term at UGA.
- Spring '11