EC248 Exam Review|Questions Solved 100%
Correct
- when firms can't tell frail from robust individuals frail still receive full insurance at
actuarially fair price
- robust receive inferior contracts that are not as full as they like, quantity is constrained -
✔Who is harmed?
- government forces everyone to buy the contract at intersection of full insurance line and
zero profit line
- assumption that health differences between robust and frail only appear overtime as
customers age - ✔Solving Adverse Selection
- 2 customers pool together at age 18
- by age 50 1 customer is robust and 1 is frail
- solves adverse selection but creates antagonistic relationships and may be
legally unenforceable
- premium insurance - ✔Lifetime Insurance Contract
- premiums from loaded so robust individuals and frail want to remain in contract voluntarily
- customers can't switch insurers, no competitive pressure - ✔Guaranteed
Renewable Contract
- no pooling equilibrium
- in separating equilibrium robust are quantity constrained - ✔Rothschild-Stiglitz Model
- ✔Chapter 10
,- a higher per unit price for a large purchase of a commodity
- discount= lower per unit price for a large purchase
- bulk mark ups protect from risk customers who want a slot of insurance (predicted
by Rothschild Model) - ✔Bulk Mark-Ups
- individuals are able to predict their health care costs for the year with good degree
of accuracy, more accurate than insurance companies
- families with high predicted costs more likely to want supplemental insurance
- evidence for adverse selection in insurance markets - ✔RAND HIE
- positive correlation disappears when adjust for age, race and gender
- evidence against adverse selection - ✔Employer Sponsored Insurance
- negative correlation
- advantageous selection
- seniors with greater cognitive ability healthier and more likely to purchase supplemental
insurance
- evidence against adverse selection - ✔Medicare Beneficiaries
- automobile insurance, positive risk coverage correlation in Israel but not France
- Life insurance, bulk discounting in market for teachers
- Negative risk coverage correlation, people with life insurance live longer -
✔Adverse Selection in Other Markets
- firm purchases a life insurance contract from a sick person then collects payout when they die
- adverse selection suggests relatively healthy HIV patients should sell their insurance contracts
more readily, this was not in the 1990 vatical settlement - ✔Vatical Settlements
, - customers misperceive own risk
- customers don't act on private info (fail to realize their advantage)
- insurers can accurately observe customer risks
- advantageous selection, healthier people more likely to buy more insurance, no death
spiral with insurance pooling - ✔Why would adverse selection not occur?
- ✔Chapter 11
- tendency for insurance against loss to reduce incentives to prevent or minimize cost of
the loss, carelessness and fraud
- downside of health insurance because it raises society level of health care expenditures
- ✔Moral Hazard
- Individual faces some risk of base event X, and his actions can increase or decrease
its likelihood
- holds insurance contract that will help pay some or all of the costs of X thus his price of X
is now decreasing
- In response to the price distortion he changes his behaviour in a way that increases
the chance of X or the costs of recovering from X
- Insurance company cannot observe the behaviour change (asymmetric info)
- riskier behaviour leads to a social loss - ✔Moral Hazard Pattern
- behaviour changes that occur before an insured event happens and make that event
more likely
- leaving stove on, skipping vaccine - ✔Ex ante
- behaviour changes that occur after insured event happens and make recovering from
that event more expensive
Correct
- when firms can't tell frail from robust individuals frail still receive full insurance at
actuarially fair price
- robust receive inferior contracts that are not as full as they like, quantity is constrained -
✔Who is harmed?
- government forces everyone to buy the contract at intersection of full insurance line and
zero profit line
- assumption that health differences between robust and frail only appear overtime as
customers age - ✔Solving Adverse Selection
- 2 customers pool together at age 18
- by age 50 1 customer is robust and 1 is frail
- solves adverse selection but creates antagonistic relationships and may be
legally unenforceable
- premium insurance - ✔Lifetime Insurance Contract
- premiums from loaded so robust individuals and frail want to remain in contract voluntarily
- customers can't switch insurers, no competitive pressure - ✔Guaranteed
Renewable Contract
- no pooling equilibrium
- in separating equilibrium robust are quantity constrained - ✔Rothschild-Stiglitz Model
- ✔Chapter 10
,- a higher per unit price for a large purchase of a commodity
- discount= lower per unit price for a large purchase
- bulk mark ups protect from risk customers who want a slot of insurance (predicted
by Rothschild Model) - ✔Bulk Mark-Ups
- individuals are able to predict their health care costs for the year with good degree
of accuracy, more accurate than insurance companies
- families with high predicted costs more likely to want supplemental insurance
- evidence for adverse selection in insurance markets - ✔RAND HIE
- positive correlation disappears when adjust for age, race and gender
- evidence against adverse selection - ✔Employer Sponsored Insurance
- negative correlation
- advantageous selection
- seniors with greater cognitive ability healthier and more likely to purchase supplemental
insurance
- evidence against adverse selection - ✔Medicare Beneficiaries
- automobile insurance, positive risk coverage correlation in Israel but not France
- Life insurance, bulk discounting in market for teachers
- Negative risk coverage correlation, people with life insurance live longer -
✔Adverse Selection in Other Markets
- firm purchases a life insurance contract from a sick person then collects payout when they die
- adverse selection suggests relatively healthy HIV patients should sell their insurance contracts
more readily, this was not in the 1990 vatical settlement - ✔Vatical Settlements
, - customers misperceive own risk
- customers don't act on private info (fail to realize their advantage)
- insurers can accurately observe customer risks
- advantageous selection, healthier people more likely to buy more insurance, no death
spiral with insurance pooling - ✔Why would adverse selection not occur?
- ✔Chapter 11
- tendency for insurance against loss to reduce incentives to prevent or minimize cost of
the loss, carelessness and fraud
- downside of health insurance because it raises society level of health care expenditures
- ✔Moral Hazard
- Individual faces some risk of base event X, and his actions can increase or decrease
its likelihood
- holds insurance contract that will help pay some or all of the costs of X thus his price of X
is now decreasing
- In response to the price distortion he changes his behaviour in a way that increases
the chance of X or the costs of recovering from X
- Insurance company cannot observe the behaviour change (asymmetric info)
- riskier behaviour leads to a social loss - ✔Moral Hazard Pattern
- behaviour changes that occur before an insured event happens and make that event
more likely
- leaving stove on, skipping vaccine - ✔Ex ante
- behaviour changes that occur after insured event happens and make recovering from
that event more expensive
