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Who will choose large deductible (share paid by the insuree before the insurance pays)?

- Less risk-averse individuals (risk-averse individuals want to insure everything)
- better-off individuals (paying for small costs is okay)
- low-risk individuals


Results of adverse selection in insurance market

- no pooling eq (cream-skimming is possible)
- no full insurance for both types
- separating eq can exist with full insurance for high-risk people but not for low-risk (as in EI)


Benefits of private insurance over public insurance

- Sharper incentives for productive efficiency and innovation
- variety of offering is easier


Contracting out of public insurance

Not sustainable as there would be self-selection, eg. for unemployment insurance, low-risk people stand to gain more from contracting out, which would leave the state with only bad risks to insurance


Ways to control moral hazard (in insurance)

- deductibles and co-insurance
- better info and monitoring (eg. monitoring devices in cars)
- rationing on the basis of assessment of need (not allowing everything)


Public vs. private sector in handling MH

- private sector can't sustain huge losses indefinitely
- may be economies of scale in gathering info, probably favouring the state
- arbitrary rationing of entitlements may be more acceptable if made by the state instead of a profit-motivated private insurer


Controlling MH in P-A relationships

The idea is to align interests of P and A:
- bonuses for senior managers based on profits or other targets
- sales commissions
- shares to employees
-> formally: incentive compatible contract


Why are some of the mechanisms used in the private sector to reduce MH in P-A relationships less effective in the public sector?

Because some dimensions of output cannot be easily measured, unlike profits in the private sector


Measuring government output

Some measures may distort behaviour:
- surgeon refusing to take on difficult cases that risk worsening his average performance
- school performance incentives may encourage selection of students, exclusion of difficult ones, focus on exam prep rather than broader aspects of education, etc.
-> professional ethos may be more effective at maintaining quality than incentive pay


Some strategies used to improve public sector performance

- monitoring by public sector audit agencies
- budget based on performance
- incentives and bonuses for individual staff
- decentralisation -> yardstick competition
- contracting-out (to private sector)
- consumer pressure by making info on performance public
- privatisation