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slides13 - Adverse Selection Lemons Principle Experiment...

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Adverse Selection Lemons Principle Experiment Discussion Insurance – Adverse Selection Angela Fertig Spring 2010 Angela Fertig Insurance – Adverse Selection
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Adverse Selection Lemons Principle Experiment Discussion Adverse Selection I Definition: Adverse selection is the tendency for people who need insurance (the unhealthy) to be more likely to have insurance, or to choose more generous insurance plans I asymmetric information: one knows more than other; e.g. patient knows more than insurer Angela Fertig Insurance – Adverse Selection
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Adverse Selection Lemons Principle Experiment Discussion Lemons Principle Lemons Principle: when there is asymmetric information, the bad drives out the good Akerlof’s (1970) used-car market I When insurance companies can’t determine your health, they assume average health and charge appropriate premium I That premium will be too high for those in good health I Only those in poor health will buy policies and insurance company will lose money, charge higher premium
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slides13 - Adverse Selection Lemons Principle Experiment...

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