L20: Social Insurance - Introduction Flashcards
social insurance program
government intervention in the provision of insurance against adverse events
major programs
health insurance
retirement and disability insurance
unemployment insurance
insurance
promise to make some payment in case of a particular event in exchange for a payment, called a premium
insurance premiums
money paid to an insurer so that an individual will be insured against adverse events
why do individuals value insurance?
with declining marginal utility, individuals value additional resources more when income is low or needs high than when income is high and needs low
expected utility
sum of utilities across states of the world, weighted by the possibilities of each state occurring
actuarially fair insurance
cost of insurance is calculated based on the computing of risk
heterogeneity in risks: symmetric information
efficient private insurance does not equalise consumption across types
- those with pre-existing conditions pay more
heterogeneity in risks: asymmetric information
pooling equilibrium
- one contract offered based on average risk
- good for sick, bad for healthy
separating equilibrium
- two contracts, one for each type
- if groups are different enough, unravelling since only high-risk people sign up and premium is actuarially fair
- different types insuring and selecting into the insurance policies that are designed for them
adverse selection
when individuals know more about their risk level than insurers and so higher-risk individuals are more likely to purchase insurance
in the case of pooling equilibrium, adverse selection leads toa death spiral where only the sickly are insured and premiums are high
how does government address adverse selection?
imposing a mandate
- everyone is required to purchase insurance
- low ends up subsidising high risk
other reasons for social insurance
redistribution
administrative costs
- lower for government, if the need to assess individual risks is removed
externalities
individual failures
samaritan’s dilemma
moral hazard
adverse actions taken by insured individuals in response to insurance against adverse outcomes
effects of moral hazard on insurance
increases the cost of provision and affects both private and social
optimal social insurance
benefit is the amount of consumption smoothing provided by social insurance programs
cost is the moral hazard caused by insuring against adverse events
