CHAPTER 9 ADVERSE SELECTION: THE ROTHSCHILD-STIGLITZ MODEL
CHAPTER 9 ADVERSE SELECTION: THE ROTHSCHILD-STIGLITZ MODEL
Intro Previously,we studied: Demand for insurance Risk aversion but no information asymmetry Akerlof's market for lemons information asymmetry but no risk aversion The Rothschild-Stiglitz Model(1976)puts these two together. Bhattacharya,Hyde and Tu-HealthEconomics
Bhattacharya, Hyde and Tu – Health Economics Intro Previously, we studied: Demand for insurance ◼ Risk aversion but no information asymmetry Akerlof’s market for lemons ◼ information asymmetry but no risk aversion The Rothschild-Stiglitz Model (1976) puts these two together
The IH-ls space Ch 9 Adverse Selection:The Rothschild- Stiglitz model
Ch 9 | Adverse Selection: The RothschildStiglitz model The IH -IS space
lH-Is space Recall the income-utility space Take HE and SE points and bundle them to one point E(endowment point)in IH-Is space Point E shows the income of an individual in both the healthy and the sick state U Is SE E SE He pnattacnarya,myae ana iu-HealthEconomics
Bhattacharya, Hyde and Tu – Health Economics IH -IS space Recall the income-utility space Take HE and SE points and bundle them to one point E (endowment point) in IH -IS space Point E shows the income of an individual in both the healthy and the sick state
lH-ls space Point C represents a partial insurance contract Horizontal shift=premium(r) Vertical shift payout if sick(q-r) U Is q-r E SE SE Sc →H Hc HE pnattacnarya,myue and iu-meaitnEconomics
Bhattacharya, Hyde and Tu – Health Economics IH -IS space Point C represents a partial insurance contract Horizontal shift = premium (r) Vertical shift = payout if sick (q-r)
la-ls space Given C,C2,C3,Ca and Is endowment point E we can make some assumptions: Individual prefers C,to C Prefers C to C3 ▣Cannot compare a C2 preference between C,to Ca ▣Cannot compare preferences to E Bhattacharya,Hyde and Tu-HealthEconomics
Bhattacharya, Hyde and Tu – Health Economics IH -IS space Given C1 , C2 , C3 , C4 , and endowment point E we can make some assumptions: Individual prefers C2 to C1 Prefers C1 to C3 Cannot compare preference between C1 to C4 Cannot compare preferences to E
INDIFFERENCE CURVES IN IH-Is Space Ch 9 Adverse Selection:The Rothschild- Stiglitz model
Ch 9 | Adverse Selection: The RothschildStiglitz model INDIFFERENCE CURVES IN IH -IS Space
Indifference curves in ly-ls space Downward sloping 6 Willing to give up income in one state if compensated for more income in the other state 2)Convex More downward-slopingat low levels of Iy but flatter at high levels U1- C2 Is and IH are imperfect substitute: Result of risk aversion C3 C4 E Bhattacharya,Hyde and Tu-HealthEconomics
Bhattacharya, Hyde and Tu – Health Economics Indifference curves in IH -IS space 1) Downward sloping Willing to give up income in one state if compensated for more income in the other state 2) Convex More downward-sloping at low levels of IH but flatter at high levels IS and IH are imperfect substitutes Result of risk aversion
THE FULL-INSURANCE LINE Ch 9 Adverse Selection:The Rothschild- Stiglitz model
Ch 9 | Adverse Selection: The RothschildStiglitz model THE FULL-INSURANCE LINE
The full-insurance line ▣The45%line is the s full-insurance line Why?What does this have to do with state independence? full-insurance line Is=IH C2 Any point on this line represents a full insurance contract. 45° H Bhattacharya,Hyde and Tu-HealthEconomics
Bhattacharya, Hyde and Tu – Health Economics The full-insurance line The 45% line is the full-insurance line Why? What does this have to do with state independence? Any point on this line represents a full insurance contract