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- Title
Adverse selection and risk pooling in the health insurance market: A classroom demonstration.
- Authors
Staveley-O'Carroll, James; Gai, Yunwei
- Abstract
The authors describe an asymmetric information demonstration that assigns students different probabilities of incurring healthcare expenses. In each round, students choose whether to purchase insurance; then, the instructor randomly determines who gets "sick." After computing insurer profits, students help determine a new insurance price to maximize future profit. Within three rounds, students recognize that the provider always incurs losses from adverse selection, opening a discussion of market failures pertaining to health insurance and asymmetric information. The experiment features idiosyncratic, but not systematic, risk as such; the same number of students get "sick" every round. Therefore, the instructor can straightforwardly demonstrate the benefits of risk pooling. The experiment is applicable to economic principles as well as intermediate courses in healthcare economics and microeconomic theory.
- Subjects
INSURANCE companies; HEALTH insurance; INFORMATION asymmetry; MARKET failure; CLASSROOMS; SCHOOL year
- Publication
Journal of Economic Education, 2023, Vol 54, Issue 3, p256
- ISSN
0022-0485
- Publication type
Academic Journal
- DOI
10.1080/00220485.2023.2183919