nep-ias New Economics Papers
on Insurance Economics
Issue of 2007‒04‒09
eleven papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Health Insurance and Consumer Welfare: The Case of Monopolistic Drug Markets By Anlauf, Markus; Wigger, Berthold U.
  2. Optimal State-Contingent Unemployment Insurance By Sanchez, Juan M.
  3. Celebrating Pork: The Dubious Success of the Medicare Drug Benefit Health Insurance for the Elderly By Dean Baker
  4. Charity hazard - A real hazard to natural disaster insurance By Paul Raschky; Hannelore Weck-Hannemann
  5. Co-payment systems in health care: between moral hazard and risk reduction By Ed Westerhout; Kees Folmer
  6. Estimating the effects of risk transfer mechanisms against floods in Europe and U.S.A.: A dynamic panel approach By Paul Raschky
  7. Unemployment Insurance in an Economy with a Hidden Labor Market By Alvarez-Parra, Fernando A.; Sanchez, Juan M.
  8. Discrimination and Resistance to Low Skilled Immigration By Alexander Kemnitz
  9. Unemployment, Technology and the Welfare Effects of Immigration By Alexander Kemnitz
  10. International Comparison of Household Savings Behaviour: A Study of Life-Cycle Savings in Seven Countries By Börsch-Supan, Axel
  11. Age, SES, and Health: A Population Level Analysis of Health Inequalities over the Life Course By Steven Prus

  1. By: Anlauf, Markus; Wigger, Berthold U. (Institut für Volkswirtschaft und Statistik (IVS))
    Abstract: Individual moral hazard engendered by health insurance and monopolistic production are both typical phenomena of drug markets. We develop a simple model containing these two elements and show that private agents tend to overinsure themselves against health respectively drug expenses if drugs can be produced at low marginal costs. If marginal costs are negligible, health insurance should be abandoned at all.
    JEL: I11 D42 H51
  2. By: Sanchez, Juan M.
    Abstract: Since the probability of finding a job is affected not only by individual effort but also by the aggregate state of the economy, designing unemployment insurance payments conditional on the business cycle could be valuable. This paper answers a fundamental question related to this issue: How should the payments vary with the aggregate state of the economy?
    Keywords: Unemployment Insurance; Aggregate Fluctuations; Recursive Contracts and Moral Hazard.
    JEL: J68 D82 D61 J65 D74
    Date: 2006–04
  3. By: Dean Baker
    Abstract: Projected costs for Medicare Part D have been revised downward, causing some analysts to claim that the program has proven itself a success. This report explores the factors behind the lower cost projections and reaches far different conclusions. It finds two main reasons: 1) a slowdown in the rate of growth in drug prices that preceded the introduction of the benefit; and 2) fewer people are expected to enroll in the program. The report recommends changes to the program that could save $30 billion a year.
    JEL: I18 L12 H51 H21
    Date: 2007–03
  4. By: Paul Raschky; Hannelore Weck-Hannemann
    Abstract: After the flooding in 2002 European governments provided billions of Euros of financial assistance to their citizens. Although there is no doubt that solidarity and some sort of assistance is reasonable, the question arises why these damages were not sufficiently insured. One explanation why individuals reject to obtain insurance cover against natural hazards is that they anticipate governmental and private aid. This problem became to be known as "charity hazard". The present paper gives an economic analysis of the institutional arrangements on the market for natural disaster insurances focusing on imperfections caused by governmental financial relief. It provides a theoretical explanation why charity hazard is a problem on the market for natural disaster insurances, in the way that it acts as an obstacle for the proper diffusion and therefore the establishment of natural hazard insurances. This paper provides a review of the scientific discussion on charity hazard, provides a theoretical analysis and points out the existing empirical problems regarding this issue.
    Keywords: natural hazard insurance, market failure, governmental assistance
    JEL: Q54 R11 G22
    Date: 2007–03
  5. By: Ed Westerhout; Kees Folmer
    Abstract: It is well-known that co-payments in health insurance may increase social welfare by reducing moral hazard. Considerably less is known about the form co-payment schemes should ideally take. This paper investigates what co-payment rate and co-payment maximum characterize the optimal scheme, i.e. the scheme that achieves the highest level of social welfare, within the class of two-part co-payment schemes of which the second part features a zero rate. It also quantifies the welfare losses that correspond with sub-optimal co-payment schemes. The paper uses a model with optimizing households that are risk-averse, exercise priceelastic demand and are aware of the kinks in their budget constraints. Numerical simulations with this model indicate that the optimal scheme combines a 80% rate with a maximum of about 600 euro. Sensitivity analysis shows that the maximum varies a lot with changes in basic parameters; the 80% value for the optimal co-payment rate is quite robust, though. The welfare losses that correspond to alternative co-payment schemes are generally quite small.
    Keywords: Moral Hazard; Deductibles; Co-payments
    JEL: D60 H21 I18
    Date: 2007–02
  6. By: Paul Raschky
    Abstract: An analysis of the effects of natural hazards on society does not solely depend on a region's topographic or climatic exposure to natural processes, but the region's institutional resilience to natural processes that ultimately determines whether natural processes result in a natural hazard or not. An appropriate method for an international institutional comparison in the field of natural hazard management is still missing. The focus in this paper is on the institutional comparison of societal risk transfer mechanisms mitigating the effects disasters. Dynamic panel estimates using growth data from a) 199 European regions (NUTSII) between 1990-2004 and b) 3.050 U.S. counties between 1970-2003 reveal a significant negative impact of historical flood events on regional economic development. The application of GIS-data on the spatial distribution of flood events further allows to control for a regions exposure to floods. In the short run, a major flood event in a European region reduces the regional GDP by 0.4%-0.6%; an average flood event in the U.S.A reduces the personal income by 0.3%-0.4%. Mandatory insurance regimes in Europe absorb the negative short-run effect of a flood, while the National Flood Insurance Program (NFIP) in the U.S.A. mitigate the effects of a flood by about 50%. The results provide empirical foundation for the proposition that ex ante risk transfer policies are more efficient than ex post disaster relief.
    Keywords: Natural hazards, Growth, Insurance, Dynamic Panel GMM
    JEL: G22 Q54 R11
    Date: 2007–03
  7. By: Alvarez-Parra, Fernando A.; Sanchez, Juan M.
    Abstract: This paper considers the problem of optimal unemployment insurance in a moral hazard framework. Unlike existing literature, unemployed workers can secretly participate in a hidden labor market; as a consequence, an endogenous lower bound for promised utility preventing "immiserization" arises. Moreover, the presence of a hidden labor market makes possible an extra deviation and therefore hardens the provision of incentives. Under linear cost of effort, we show that the optimal contract prescribes no participation in the hidden labor market and a decreasing sequence of unemployment payments until the lower bound for promised utility is reached. At that moment, participation jumps and unemployment payments drop down to zero. For the case of non-linear effort cost we calibrate the model to Spain. As in the linear cost of effort, this exercise reproduces no participation and decreasing payments during the initial phase of unemployment. After around three years of unemployment, the contract prescribes a jump in participation and an abrupt decline in unemployment payments. To the best of our knowledge, this is the first paper justifying an abrupt drop in unemployment payments. In addition, the quantitative analysis suggests that in an environment in which agents differ in separation rate, the hidden labor market reinforces the benefits from a type-dependent unemployment system.
    Keywords: Unemployment Insurance; Hidden Labor Markets; Moral Hazard; Recursive Contracts
    JEL: J68 D82
    Date: 2006–12
  8. By: Alexander Kemnitz (Institut für Volkswirtschaft und Statistik (IVS))
    Abstract: This paper shows that the immigration of some low skilled workers can be of advantage for the low skilled natives when the host economy suffers from unemployment due to trade unions and an unemployment insurance scheme. This benefit arises if trade unions have appropriate bargaining power and preferences for members' income, labor market discrimination against immigrants is strong enough and the unemployment tax rate is low.
    JEL: F22 J5 J61 J7
  9. By: Alexander Kemnitz (Institut für Volkswirtschaft und Statistik (IVS))
    Abstract: This paper explores the effects of high and low skilled immigration to a host country with unionized low skilled labor and an unemployment insurance scheme. It is shown that the consequences for the labor market and the welfare of natives depend crucially on the host country's production structure. When high and low skilled labor are close substitutes, low skilled immigration boosts employment and can increase total native income. We provide conditions under which low skilled immigration is Pareto-improving. While high skilled immigration has adverse employment effects, the Endings reverse for the case of close complementarity.
    JEL: F22 J5 H53 J61 J65
  10. By: Börsch-Supan, Axel (Institut für Volkswirtschaft und Statistik (IVS))
    Abstract: Household saving is still little understood, and even the basic facts for instance: How does saving change over the life cycle? Do the elderly draw down their wealth? are controversial. Understanding saving behaviour is not only an important question because the division of income in consumption and saving concerns one of the most fundamental household decisions, but it is also of utmost policy relevance since private household saving as a private insurance interacts with social policy as public insurance. Population ageing and its threat to the sustainability of the public insurance systems has put the spotlight back on own saving as a device for old-age provision. Solving the pension crises therefore requires understanding saving. This special issue of Research in Economics is devoted to a further step in this direction. It presents a first stock taking of the International Savings Comparison Project a project performed under the auspices of a European Union sponsored network of researchers.<br>The main focus of this project is the interaction of household saving with public policy, notably the generosity and design of public pension systems. It is very much in the tradition of Feldstein’s (1974) seminal study, but we transpose the inference from time series data to a set of international panel data.
  11. By: Steven Prus
    Abstract: This paper tests two competing hypotheses on the relationship between age, SES, and health inequality at the cohort/population level. The accumulation hypothesis predicts that levels of SES- based health inequality and consequently overall health inequality within a cohort progressively increase as it ages. The divergence-convergence hypothesis predicts that these inequalities increase only up to early-old age then decrease. Data from a Canadian national health survey are used in this study, and are adjusted for SES-biases in mortality. Bootstrap methods are employed to assess the statistical precision and significance of the results. The Gini coefficient is used to estimate change in the overall level of health inequality with age and the Concentration coefficient estimates the contribution of SES- based health inequalities to this change. Health is measured using the Health Utilities Index and income and education provide the measure of SES. First, the findings show that the Gini coefficient progressively increases from 0.048 (95% CI: 0.045, 0.051) at ages 15-29 to 0.147 (95% CI: 0.131, 0.163) at ages 80+. Second, the data reveal that health inequalities between SES groups (Concentration coefficients for income and education) tend to follow a similar pattern of divergence. Together these findings provide support for the accumulation hypothesis. A notable implication of the study's findings is that the level of health inequality increases when compensating for age-specific socio- economic differences in mortality. These selective effects of mortality should be considered in future research on health inequalities and the life course.
    Keywords: Health Inequality, Life Course, SES, Gini/Concentration coefficient
    JEL: C10 I10
    Date: 2007–04

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