Medical insurance with rank-dependent utility

Date

2003

Authors

Ryan, Matthew
Vaithianathan, R.

Journal Title

Journal ISSN

Volume Title

Publisher

Springer

Abstract

A well-known result in the medical insurance literature is that zero coinsurance is never second-best for insurance contracts subject to moral hazard. We replace the usual expected utility assumption with a version of the rank-dependent utility (RDU) model that has greater experimental support. When consumers exhibit such preferences, we show that zero co-insurance may in fact be optimal, especially for low-risk consumers. Indeed, it is even possible that the first-best and second-best contracts are identical. In this case, there is no "market failure", despite the informational asymmetry. We argue that these RDU results are in better accord with the empirical evidence from US health insurance markets.

Description

Keywords

Keywords: Coinsurance; Health insurance; Inverse-S transformation; Rank-dependent expected utility

Citation

Source

Economic Theory

Type

Journal article

Book Title

Entity type

Access Statement

License Rights

DOI

10.1007/s00199-002-0336-1

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