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Choice in insurance markets: a Pigouvian approach to social insurance design

Hendren, Nathaniel, Landais, Camille and Spinnewijn, Johannes (2021) Choice in insurance markets: a Pigouvian approach to social insurance design. Annual Review of Economics, 13. 457 - 486. ISSN 1941-1383

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Identification Number: 10.1146/annurev-economics-090820-111716


Should choice be offered in social insurance programs? This review presents a conceptual framework that identifies the key forces determining the social value of offering choice. We show that the value of offering choice is higher the larger the variation in individual valuations for extra insurance is, but it gets reduced by both selection on risk and selection on moral hazard. Besides adverse selection, the implementation of choice-based policies is further challenged by the presence of choice frictions or the obligation to offer basic uncompensated care. All these inefficiencies can be seen as externalities that do not rationalize the absence of providing choice per se but point to the need for regulatory policies and suggest the potential value of corrective pricing a la Pigou. Applying this framework to the existing evidence on these forces in the context of unemployment insurance, we find that offering insurance choice can be valuable even in the presence of significant adverse selection. We conclude by showing how this framework can constitute a fruitful guide for further empirical research in different insurance domains.

Item Type: Article
Official URL:
Additional Information: © 2021 Annual Reviews Inc.
Divisions: Economics
Subjects: H Social Sciences > HB Economic Theory
JEL classification: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information
G - Financial Economics > G2 - Financial Institutions and Services > G22 - Insurance; Insurance Companies
J - Labor and Demographic Economics > J6 - Mobility, Unemployment, and Vacancies > J65 - Unemployment Insurance; Severance Pay; Plant Closings
Date Deposited: 06 May 2022 10:36
Last Modified: 13 Jul 2022 08:24

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