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Public versus Private Insurance with Non-Expected Utility: A Political Economy Argument

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  • Jean Hindriks

    (Queen Mary, University of London)

Abstract

This paper analyzes the political support for public insurance in the presence of a private insurance alternative. The public insurance is compulsory and offers a uniform insurance policy. The private insurance is voluntary and can offer different insurance policies. Adopting Yaari's (1987) dual theory to expected utility (i.e., risk aversion without diminishing marginal utility of income), we show that adverse selection on the private insurance market may lead a majority of individuals to prefer public insurance over private insurance, even if the median risk is below the average risk (so that the median actually subsidizes high-risk individuals). We also show that risk aversion makes public insurance more attractive and that the dual theory is less favourable to a mixed insurance system than the expected utility framework. Lastly, we demonstrate how the use of genetic tests may threaten the political viability of public insurance.

Suggested Citation

  • Jean Hindriks, 2001. "Public versus Private Insurance with Non-Expected Utility: A Political Economy Argument," Working Papers 439, Queen Mary University of London, School of Economics and Finance.
    • Handle: RePEc:qmw:qmwecw:439
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    References listed on IDEAS

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    More about this item

    Keywords

    Voting; Insurance; Adverse selection;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health

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