Chapter 10, Problem 6E

Indicate whether the statement is true or false, and justify your answer.The Rothschild–Stiglitz model predicts that people who own life insurance should have fewer unobserved traits (that is, unobserved by insurance companies) that lead to a higher risk of death when compared against people with the same level of income but who do not own life insurance.

Indicate whether the statement is true, false, or unclear, and justify your answer.One of the major predictions of the Rothschild–Stiglitz model is a positive correlation between risk and insurance coverage. This has never been observed in practice due to the confounding influence of moral hazard.

Indicate whether the statement is true or false, and justify your answer.In a Rothschild–Stiglitz model separating equilibrium, there is a volume discount for insurance purchases – those who choose to buy more insurance pay a lower per-unit price for it.

Indicate whether the statement is true or false, and justify your answer.The RAND study was especially useful for measuring price elasticities because it randomly assigned insurance plans to participants

Indicate whether the statement is true or false, and justify your answer.In a Rothschild–Stiglitz model separating equilibrium, low-risk consumers of insurance are quantity constrained. They cannot buy as much insurance as they want because the insurance company is worried it will lose money on them.

Consider the case of a competitive health insurance market, similar to what we studied in the graphical framework in Week 4A. Assume that, as in the Affordable Care Act, the government allows many insurers to compete (perfect competition) to offer the one kind of insurance contract allowed (this is just the same as the framework we’ve discussed all along, starting in Week 4A). Consumer demand for insurance is described by: P = 15 - .7 Q Qmax = 20 Assume that marginal and average costs are characterized by: MC= 10 – 4Q AC= 10 - .2Q A. Compute the competitive market price and quantity outcome under the usual assumptions. B. Compute the welfare loss from adverse selection in this competitive market. Also, compute the number of people who should have insurance from a social perspective. Remember that some people here may not have positive social value of insurance, so shouldn't be counted in the deadweight loss from adverse selection. This could be because, e.g. there are administrative…

In the early 2000s, the state of Massachusetts in the U.S. implemented a health reform aimed at enrolling people without health insurance into an insurance plan. The reform required people without health insurance (at least those who could afford it) to buy insurance, and put in place penalties on those who nevertheless chose not to buy insurance. Below is the abstract of a recent National Bureau of Economic Research working paper entitled “Health Reform, Health Insurance, and Selection: Estimating Selection into Health Insurance Using the Massachusetts Health Reform” by Martin Hackmann, Jonathan Kolstad, and Amanda Kowalski. The authors conducted a study of the effects of the Massachusetts reform. They write:   We implement an empirical test for selection into health insurance using changes in coverage induced by the introduction of mandated health insurance in Massachusetts. Our test examines changes in the cost of the newly insured relative to those who were insured prior to the…

Indicate whether the statement is true or false, and justify your answer.Results from the Oregon Medicaid Experiment suggest that having health insurance has a positive impact on health status.

Indicate whether the statement is true or false, and justify your answer.Under the typical assumptions of the Rothschild–Stiglitz model, there is nothing that an insurance company can do to distinguish between robust and frail customers.