Choice in insurance markets: a Pigouvian approach to social insurance design

Nathaniel Hendren, Camille Landais and Johannes Spinnewijn

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Should choice be offered in social insurance programs? This review presents a conceptual framework that identifies the key forces determining the social value of offering choice. We show that the value of offering choice is higher the larger the variation in individual valuations for extra insurance is, but it gets reduced by both selection on risk and selection on moral hazard. Besides adverse selection, the implementation of choice-based policies is further challenged by the presence of choice frictions or the obligation to offer basic uncompensated care. All these inefficiencies can be seen as externalities that do not rationalize the absence of providing choice per se but point to the need for regulatory policies and suggest the potential value of corrective pricing a la Pigou. Applying this framework to the existing evidence on these forces in the context of unemployment insurance, we find that offering insurance choice can be valuable even in the presence of significant adverse selection. We conclude by showing how this framework can constitute a fruitful guide for further empirical research in different insurance domains.

Keywords: adverse selection; moral hazard; optimal mandate; Pigouvian subsidy (search for similar items in EconPapers)
JEL-codes: D82 G22 J65 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2021-08-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in Annual Review of Economics, 1, August, 2021, 13, pp. 457 - 486. ISSN: 1941-1383

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Related works:
Journal Article: Choice in Insurance Markets: A Pigouvian Approach to Social Insurance Design (2021)
Working Paper: Choice in Insurance Markets: A Pigouvian Approach to Social Insurance Design (2020)
Working Paper: Choice in Insurance Markets: A Pigouvian Approach to Social Insurance Design (2020)
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