Welfare analysis in insurance markets

Casey Rothschild

The Geneva Risk and Insurance Review, 2024, vol. 49, issue 1, No 3, 36-58

Abstract: Abstract “Efficiency” in economics can be employed in two distinct ways: as a statement about the class of policies that all policy advisors would agree to, regardless of their views about distributional preferences; or as something valuable that policy advisors potentially need to trade-off against equity goals. This distinction can be safely put to the side in some settings, for instance when information is symmetric, individuals have linear-in-consumption preferences, and the planner can implement person-specific taxes and transfers. In asymmetric information settings like insurance markets, it cannot. The efficiency notion employed by Einav and Finkelstein (J Econ Perspect 25(1):115–138, 2011) for studying competitive insurance markets (EF-efficiency) can therefore only be understood in the second way, and policy recommendations based on EF-efficiency alone thus amount to a tacit expression of indifference to distributional concerns.

Keywords: Size of the pie; Efficiency-equity tradeoffs; Constrained Pareto frontier; Second best efficiency (search for similar items in EconPapers)
JEL-codes: D60 D82 H21 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1057/s10713-024-00096-7

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