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On the political economy of adverse selection

Author

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  • Hervé Crès

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)

  • Mich Tvede

    (Department of Economics [Copenhagen] - Faculty of Social Sciences [Copenhagen] - UCPH - University of Copenhagen = Københavns Universitet)

Abstract

We consider a standard insurance economy where consumers are supposed to vote over menus of insurance contracts: A menu of contracts is majority stable if there does not exist another menu which is supported by an appropriate majority of consumers. We compute the smallest level of super majority for which there always exists a stable menu of contracts, and such that all stable menus of contracts are Pareto optimal. Lower super majority voting rules may ensure existence of stable menus if individual states and/or types of consumers are aggregated, but then stable menus of contracts need not be Pareto optimal: hence a trade-off between Pareto optimality and conservativeness of the voting rule is exhibited.

Suggested Citation

  • Hervé Crès & Mich Tvede, 2005. "On the political economy of adverse selection," SciencePo Working papers Main hal-01065577, HAL.
    • Handle: RePEc:hal:spmain:hal-01065577
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-01065577
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    References listed on IDEAS

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    1. Mich Tvede & Hervé Crés, 2005. "Voting in assemblies of shareholders and incomplete markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 26(4), pages 887-906, November.
    2. Greenberg, Joseph, 1979. "Consistent Majority Rules over Compact Sets of Alternatives," Econometrica, Econometric Society, vol. 47(3), pages 627-636, May.
    3. Michael Rothschild & Joseph Stiglitz, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 90(4), pages 629-649.
    4. Prescott, Edward C & Townsend, Robert M, 1984. "Pareto Optima and Competitive Equilibria with Adverse Selection and Moral Hazard," Econometrica, Econometric Society, vol. 52(1), pages 21-45, January.
    5. Mich Tvede & Hervé Crès, 2005. "Voting in assemblies of shareholders and incomplete markets," SciencePo Working papers hal-03598171, HAL.
    6. Mich Tvede & Hervé Crès, 2005. "Voting in assemblies of shareholders and incomplete markets," Post-Print hal-03598171, HAL.
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