Public Versus Private Insurance with Non-Expected Utility: A Political Economy Argument

32 Pages Posted: 19 Oct 2001

See all articles by Jean Hindriks

Jean Hindriks

University of London - School of Economics and Finance

Abstract

This paper analyzes the political support for public insurance in the presence of a private insurance alternative. The public insurance is compulsory and offers a uniform insurance policy. The private insurance is voluntary and can offer different insurance policies. Adopting Yaari's (1987) dual theory to expected utility (i.e., risk aversion without diminishing marginal utility of income), we show that adverse selection on the private insurance market may lead a majority of individuals to prefer public insurance over private insurance, even if the median risk is below the average risk (so that the median actually subsidizes high-risk individuals). We also show that risk aversion makes public insurance more attractive and that the dual theory is less favourable to a mixed insurance system than the expected utility framework. Lastly, we demonstrate how the use of genetic tests may threaten the political viability of public insurance.

Keywords: Voting, insurance, adverse selection

JEL Classification: H51, H23

Suggested Citation

Hindriks, Jean, Public Versus Private Insurance with Non-Expected Utility: A Political Economy Argument. Available at SSRN: https://ssrn.com/abstract=287877 or http://dx.doi.org/10.2139/ssrn.287877

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University of London - School of Economics and Finance ( email )

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