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- Title
Medical insurance with rank-dependent utility.
- Authors
Ryan, Matthew J.; Vaithianathan, Rhema
- Abstract
A well-known result in the medical insurance literature is that zero co-insurance is never second-best for insurance contracts subject to moral hazard. We replace the usual expected utility assumption with a version of the rank-dependent utility (RDU) model that has greater experimental support. When consumers exhibit such preferences, we show that zero co-insurance may in fact be optimal, especially for low-risk consumers. Indeed, it is even possible that the first-best and second-best contracts are identical. In this case, there is no "market failure", despite the informational asymmetry. We argue that these RDU results are in better accord with the empirical evidence from US health insurance markets.
- Subjects
HEALTH insurance; EXPECTED utility; CONSUMER preferences
- Publication
Economic Theory, 2003, Vol 22, Issue 3, p689
- ISSN
0938-2259
- Publication type
Article
- DOI
10.1007/s00199-002-0336-1