| 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. |