nep-ias New Economics Papers
on Insurance Economics
Issue of 2005‒01‒02
one paper chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Illustrating Adverse Selection in Health Insurance Markets with a Classroom Game By Jennifer M. Mellor

  1. By: Jennifer M. Mellor (Department of Economics, College of William and Mary)
    Abstract: This paper describes a classroom game that illustrates the effects of asymmetric information and adverse selection in health insurance markets. The first phase of this game simulates a market in which buyers can purchase insurance from sellers who sometimes lack information about buyer type. The results demonstrate the classic prediction that asymmetric information will result in adverse selection. Here, low risk buyers will forego the purchase of insurance at a measurable loss of potential earnings. In the second phase of the game, sellers and buyers can trade two different types of health insurance policies, one moderate and another generous. The results from this simulation demonstrate how adverse selection can lead to an inefficient sorting of buyers across plans, an outcome that is discussed in Cutler and Zeckhauser (1997). In this case, too few buyers elect to purchase the generous insurance plan. The paper provides a series of questions to stimulate class discussion on the causes and consequences of adverse selection for consumers and insurers, and solutions that can be implemented in employer and government-sponsored programs.
    Keywords: Classroom, Experiment, Adverse selection
    JEL: A2 C9 D4 I1
    Date: 2004–12–10

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