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This article extends the received literature on optimal provider payment by accounting for consumer heterogeneity in preferences for health insurance and health care. This heterogeneity breaks down the separation of the relationship between providers and the health insurer and the relationship between consumers and the insurer. Both experimental and market evidence for a high degree of heterogeneity are presented. Given heterogeneity, a uniform policy fails to effectively control moral hazard, while incentives for risk selection created by community rating cannot be neutralized through risk adjustment. Consumer heterogeneity spills over into relationships with providers, such that a uniform contract with providers cannot be optimal either. The decisive condition for ensuring optimality of provider payment is to replace community rating (which violates the principle of marginal cost pricing) by risk-rating of contributions combined with subsidization targeted at high risks with low incomes.

The objective of this paper is to pursue an intuitive idea: for a consumer who represents an "unfavorable" health risk but an "excellent risk" as a driver, a multi-peril policy could be associated with a reduced selection effort on the part of the insurer. If this intuition should be confirmed, it will serve to address the decade-long concern with risk selection both in the economic literature and on the part of policy makers. As an illustrative example, a two-peril model is developed in which consumers deploy effort in search of a policy offering them maximum coverage at the current market price while insurers deploy effort designed to stave off unfavorable risks. Two types of Nash equilibria are compared: one in which the insurer is confronted with high-risk and low-risk types, and another one where both types are a "better risk" with regard to a second peril. The difference in the insurer's selection effort directed at high-risk and low-risk types is indeed shown to be lower in the latter case, resulting in a mitigation of adverse selection. [ABSTRACT FROM AUTHOR]

The objective of this paper is to assess the behavior of policyholders and insurance companies in the presence of adverse selection by accounting for costly search and selection efforts, respectively. Insurers seek to stave off high-risk types, while consumers are hypothesized to maximize coverage at a given premium. Reaction functions are derived for the two players giving rise to Nash equilibria in efforts space, which are separating almost certainly regardless of the share of low risks in the market. Empirical evidence from the Australian market for automobile insurance is analyzed using Structural Equation Modeling. Convergence has been achieved with both the developmental and test samples. Both consumer search and insurer selection are found to be positively correlated with risk type, providing a good measure of empirical support for the theoretical model. [ABSTRACT FROM AUTHOR]

The article discusses the debate surrounding the target of limiting global warming to 1.5 degrees Celsius. The economist William Nordhaus, who received the Nobel award for his work on integrating climate into economic theory, estimated that the best benefit-cost ratio was associated with a warming of 2.5 degrees Celsius. However, the Intergovernmental Panel on Climate Change (IPCC) set a target of 1.5 degrees Celsius without providing a justification in terms of costs and benefits. The article argues that the target may not be a sensible choice and suggests that governments should consider implementing a pricing system for carbon dioxide emissions instead. The article also highlights the potential side effects of government regulation on innovation and economic performance. [Extracted from the article]

The consistently missing demand for catastrophe insurance and for coverage of other low-probability–high-consequence risks is often referred to as the catastrophe insurance puzzle. People show reluctance to insure low-probability–high-consequence events, even with some disastrous consequences, yet insure against small high-probability–low-consequence events. There has been no convincing explanation of this puzzle to this date. This article points out that the underlying rationale may be that individuals interpret insurance contracts with low payout probability as an investment with negative expected net present value. While premium payments start with the conclusion of the contract, usually there is only one loss payment in the near or far future. Using a simple annuity model with fixed annual premiums and expected indemnity payouts, it is found that even an individual characterized by the degree of risk aversion found in the literature is unlikely to purchase insurance with these characteristics. To alleviate this unfavorable insurance purchase syndrome, combining a low-probability with a high-probability loss insurance contract may be a way to incentivize individuals to purchase catastrophe risk coverage. [ABSTRACT FROM AUTHOR]

As the Corona pandemic of 2020 has shown, disposing of sufficient hospital capacity is of great importance. Ideally, this capacity should be provided by efficient units, calling for measurement of their performance. However, the standard cost frontier model yields biased efficiency scores because it ignores (often unobserved) heterogeneity between hospitals. In this paper, efficiency scores are derived from a cost function with both random intercept and random slope parameters which overcomes the problem of unobserved heterogeneity in stochastic frontier analysis. Based on an unbalanced panel covering the years 2004 to 2007 and comprising at least 100 Swiss hospitals per year, Bayesian inference points to significant heterogeneity suggesting rejection of the standard cost frontier model. When unobserved heterogeneity is fully accounted for, average estimated inefficiency decreases to 5%, below the 14% (21%, respectively) value reported for a number of European and Middle-Eastern countries (Hollingsworth, 2008; Alawi et al. 2019). Moreover, hospitals rated below 85% efficiency according to the standard model gain up to 12% points. They can provide much needed capacity that otherwise would be discarded on the grounds that they are not sufficiently efficient providers. [ABSTRACT FROM AUTHOR]

Almost 100 years ago, Ludwig von Mises and Friedrich Hayek argued that a socialist state could not determine marginal cost prices and therefore could not allocate resources rationally. Oskar Lange and Abba Lerner responded with the market socialist model. Subsequent scholars have refined the model (Leeman, Roemer). Views on market socialism for an entire economy are mixed (Phelps, S h lei fer and Vishny, Roemer). We briefly review the debate. We argue that a form of market socialism exists and is especially important in education, health care, and health insurance. In these sectors, prices are often set or restricted centrally, while many providers are state-owned, nonprofit, or mutual firms. We argue in favor of applying market socialist principles to health care and to health insurance policy. In particular, we show that these principles imply that community rating of health insurance is a source of major inefficiencies and harmful regulatory pressure. We suggest moving in the market socialist direction --toward marginal cost pricing and therefore away from community rating. The desire for universal or expanded coverage can be fulfilled by explicit, politically transparent subsidies paid to consumers who are both poor and high risk. Comparative Economic Studies (2017) 59, 405-427. doi: 10.1057/s41294-0170027-3; published online 9 June 2017 Keywords: health insurance, market socialism, quasi-markets, pricing, community rating, new public management, corporatization JEL Classification: 113, P51, P27, 118, D47, B24, D02, L31, INTRODUCTION The socialist calculation debate began almost 100 years ago when Ludwig von Mises and Friedrich Hayek argued that a socialist state could not determine marginal cost prices and therefore [...]