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present to students graphical displays according to which health insurance is I. THE TEXTBOOK CASE ON THE WELFARE LOSS INHERENT IN HEALTH.
Table of contents
- Is ‘Moral Hazard’ Inefficient? The Policy Implications Of A New Theory | Health Affairs
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Citations Publications citing this paper. The design of insurance coverage for medical products under imperfect competition David Bardey , Helmuth Cremer , Jean Marie Lozachmeur.
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Economic decision analysis for healthcare service; Theory and practice Jinha Lee. Health insurance and diversity of treatment.
Randolph Beard. Saving Lives or Saving Money? Deadly gaps in the patent system : an analysis of currentand alternative mechanisms for incentivising development of medical therapies. Savvas Kerdemelidis. References Publications referenced by this paper. Saving Lives or Saving Money?
Is ‘Moral Hazard’ Inefficient? The Policy Implications Of A New Theory | Health Affairs
Deadly gaps in the patent system : an analysis of currentand alternative mechanisms for incentivising development of medical therapies. Savvas Kerdemelidis. References Publications referenced by this paper. Medco finds that old ties bind in contract with parent Merck after spinnoff , it agrees to maintain market share for Merck medicines. Are Invisible Hands Good Hands?
The pharmaceutical industry. Insurance and Incentives. This is the level of pollution at which the social damage that would be caused by an additional unit of pollution is exactly equal to the social cost that must be incurred to eliminate that additional unit of pollution. Pollution in excess of the surplus-maximizing level imposes social damage that exceeds the cost of eliminating the extra pollution.
In contrast, the cost of reducing pollution below the surplus-maximizing level exceeds the social benefits derived from the reduction in pollution. Various regulatory policies can be employed to control environmental pollution. For instance, direct taxes effluent fees can be imposed on pollution when it is readily observed and measured. By setting the tax on pollution equal to the marginal social damage caused by the pollution, the producer can be induced to realize the surplus-maximizing level of pollution.
When the level of pollution produced by a firm is difficult to measure, taxes can be imposed instead on the products whose production causes pollution, or on inputs such as gasoline to the activity automobile driving that causes pollution. The use of specific pollution abatement technologies can also be mandated.
Recently, some governments have introduced tradable pollution permits. Each permit entitles its bearer to emit one unit of pollution e. Polluting firms are able to buy and sell permits at prices determined by the available supply of and demand for these permits. A key potential benefit of tradable permits is that they promote pollution abatement at minimum cost.
Producers that are able to reduce the pollutants they expel at a cost below the prevailing price of a permit will find it profitable to do so and sell any permits that they own. In contrast, producers for whom pollution abatement is more costly than the price of a permit will continue to expel pollutants but will pay for the right to do so Schmalensee et al. Pollution abatement regulation is often intended to improve the health and well being of citizens. Other forms of health and safety regulation can serve this same purpose. The regulations come in many forms, including information requirements, standards, and prohibitions.
Regulations that require manufacturers to provide relevant product information to consumers can help consumers choose among available products.
These regulations include requirements that product contents be fully specified and that the potential health risks associated with consumption be stated clearly. In contrast, direct regulation of product standards and outright prohibitions on the sale of certain products can substitute information collection and decision-making by a regulatory body for decision-making by consumers.
For example, when the government imposes minimum home construction standards or when it bans certain drugs from the marketplace, the government eliminates the option a consumer might otherwise have to purchase below-standard homes or banned drugs. One rationale for such regulations is that they can implement the decisions that consumers would make if they were fully informed about all relevant benefits and costs of consumption, without requiring consumers to develop the expertise and obtain and evaluate the information required to assess the benefits and costs Viscusi Fang, in Handbook of the Economics of Population Aging , The theoretical prediction discussed above that the equilibrium effect of the life settlement market on consumer welfare depends on why policyholders lapse—loss of bequest motives or income shocks—motivate an empirical analysis on why do policyholders their life insurance policies in Fang and Kung a.
Lapsation is an important phenomenon in life insurance markets. Both LIMRA and the Society of Actuaries consider that a policy lapses if its premium is not paid by the end of a specified time often called the grace period. The number of policies exposed to lapse is based on the length of time the policy is exposed to the risk of lapsation during the year.
Termination of policies because of death, maturity, or conversion is not included in the number of policies lapsing and contributes to the exposure for only the percentage of the policy year they were in force.
Table 9 provides the lapsation rates of individual life insurance policies, calculated according to the preceding formula, both according to face value and the number of policies for — Of course, the lapsation rates also differ significantly by the age of the policies. Table 9. Lapsation rates of individual life insurance policies, calculated by face amount and by number of policies: — Source: American Council of Life Insurers, Reproduced from Fang, H.
Why do life insurance policyholders lapse? Loss of bequest motives vs. Fang and Kung a presented and empirically implemented a structural dynamic discrete choice model of life insurance decisions to study why life insurance policyholders lapse their policies using the limited life insurance holding information from the HRS data. They found that a large fraction of life insurance lapsation is driven by idiosyncratic choice-specific shocks, particularly when policyholders are relatively young.
But as the remaining policyholders get older, the role of such idiosyncratic shocks gets less important, and more of their lapsation is driven by either income, health, or bequest motive shocks.
Income and health shocks are relatively more important than bequest motive shocks in explaining lapsation when policyholders are young, but as they age, the bequest motive shocks play a more important role. These empirical findings have important implications regarding the effect of the life settlement industry on consumer welfare.
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As shown in theoretical analyses in Daily et al. If bequest motive shocks are the reason for lapsation, then the life settlement industry is shown to reduce consumer welfare in equilibrium; but if income shocks are the reason for lapsation, then life settlements may increase consumer welfare. To the extent that we found that both income shocks and bequest motive shocks play important roles in explaining life insurance lapsations, particularly among the elderly population targeted by the life settlement industry, our research suggests that the effect of life settlement on consumer welfare is ambiguous.
Richard W. Tresch, in Public Finance Third Edition , Peter Hammond has argued strongly, and persuasively, that applied economists should reject Marshallian consumer surplus measures of willingness-to-pay, Willig's approximation formula notwithstanding. Suppose an estimated demand curve does not lead to a closed-form solution for the indirect utility function or one of the willingness-to-pay income measures.
Even so, Roy's identity can be used to construct an ordinary differential equation in prices and income from any estimated actual demand curve. The equation can then easily be solved by today's computers using standard numerical methods.
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Hammond demonstrates the technique in terms of a solution that yields Hicks' Equivalent Variation HEV , which is a valid income measure of the change in utility. Furthermore, the technique can be applied to any number of price changes. Modern computing has simply rendered Marshallian consumer surplus obsolete. Note, finally, that the problem of estimating the HCV or HEV to justify a decreasing cost service arises only for the hard case. Simply knowing that the service could break even or make a profit at a single price is sufficient in the easy case. As such, the profitability test that the public is familiar with applies even if the service is priced at marginal cost and operated at a deficit.
Leibman and Zeckhauser argue that employers have the right motives and furthermore are in a good position to serve as agents to structure choice for their workers: …Employers have strong incentives to act as faithful agents for their employees in selecting a very limited number of health insurance options. Recall that in Chapter 5 , we defined consumer surplus at the LU equilibrium as: 8. Ruhm, in Handbook of Health Economics , 2. Gumbel willingness to pay, the consumer surplus is defined by: 4.