On the political economy of adverse selection

Hervé Crès () and Mich Tvede
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Hervé Crès: ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique
Mich Tvede: Department of Economics [Copenhagen] - Faculty of Social Sciences [Copenhagen] - UCPH - University of Copenhagen = Københavns Universitet

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Abstract: We consider a standard insurance economy where consumers are supposed to vote over menus of insurance contracts: A menu of contracts is majority stable if there does not exist another menu which is supported by an appropriate majority of consumers. We compute the smallest level of super majority for which there always exists a stable menu of contracts, and such that all stable menus of contracts are Pareto optimal. Lower super majority voting rules may ensure existence of stable menus if individual states and/or types of consumers are aggregated, but then stable menus of contracts need not be Pareto optimal: hence a trade-off between Pareto optimality and conservativeness of the voting rule is exhibited.

Date: 2005-05
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