nep-ias New Economics Papers
on Insurance Economics
Issue of 2012‒11‒03
three papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Adverse Selection, Moral Hazard and the Demand for Medigap Insurance By Michael P. Keane; Olena Stavrunova
  2. On the Sources of Risk Preferences in Rural Vietnam By Anh Duc Dang
  3. Impact of behavioral issues on green growth policies and weather-related disaster reduction in developing countries By Kunreuther, Howard; Michel-Kerjan, Erwann

  1. By: Michael P. Keane (Nuffield College, University of Oxford); Olena Stavrunova (University of Technology, Sydney, Australia)
    Abstract: The size of adverse selection and moral hazard eects in health insurance markets has important policy implications. For example, if adverse selection eects are small while moral hazard eects are large, conventional remedies for ineciencies created by adverse selection (e.g., mandatory insurance enrolment) may lead to substantial increases in health care spending. Unfortunately, there is no consensus on the magnitudes of adverse selection vs. moral hazard. This paper sheds new light on this important topic by studying the US Medigap (supplemental) health insurance market. While both adverse selection and moral hazard eects of Medigap have been studied separately, this is the rst paper to estimate both in an unied econometric framework. We develop an econometric model of insurance demand and health care expenditure, where adverse selection is measured by sensitivity of insurance demand to expected expenditure. The model allows for correlation between unobserved determinants of expenditure and insurance demand, and for heterogeneity in the size of moral hazard eects. Inference relies on an MCMC algorithm with data augmentation. Our results suggest there is adverse selection into Medigap, but the eect is small. A one standard deviation increase in expenditure risk raises the probability of insurance purchase by 0.037. In contrast, our estimate of the moral hazard eect is much larger. On average, Medigap coverage increases health care expenditure by 32%.
    Keywords: Health insurance, adverse selection, moral hazard, health care expenditure
    JEL: D82 C34 C35
    Date: 2012–10–23
  2. By: Anh Duc Dang
    Abstract: In this paper, I provide new empirical evidence that the natural environment can shape individual risk preferences. By combining historical data on weather variation and contemporary survey questions on risk aversion, I find that risk aversion is significantly different for people who live in areas that have suffered high frequency of natural disasters. In particular, households highly affected by weather volatility show a longterm risk aversion and are more willing to buy insurance to protect crop losses. The finding also supports the hypothesis that when people are used to live in a risky environment, an incremental increase in risk affects their risk preferences less.
    JEL: D03 Q54 O53
    Date: 2012–10
  3. By: Kunreuther, Howard; Michel-Kerjan, Erwann
    Abstract: This paper focuses on how developing countries can change the way they prepare for disasters so they are better equipped to sustain economic growth. It discusses the importance of considering the goals of key decision makers and the need to understand the perceptions, systematics biases, and heuristics used by the relevant interested parties (the affected public, private and public sector organizations, and nongovernmental organizations) in choosing between alternatives. The paper highlights the importance of undertaking benefit-cost analysis to evaluate disaster risk reduction measures, recognizing that decision makers might not make meaningful use of this policy tool given their behavioral biases and simplified heuristics. To address these issues, the authors propose green growth strategies that involve multi-year contracts coupled with short-term incentives that have a chance of being implemented. The strategies focus on the role of multi-year micro-insurance, long-term loans, and multi-year catastrophe bonds that reflect the institutional arrangements in the developing country. The paper illustrates this proposal in the case of farmers'agricultural practices and investment decisions that reduce losses to property from catastrophic disasters such as drought.
    Keywords: Hazard Risk Management,Debt Markets,Climate Change Economics,Insurance&Risk Mitigation,Banks&Banking Reform
    Date: 2012–10–01

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