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