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The Shifting Shape of Risk: Endogenous Market Failure for Insurance

Bureau of Economics, Federal Trade Commission, Washington, DC 20580, USA
Received: 6 July 2016 / Accepted: 9 December 2016 / Published: 27 January 2017
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This article considers an economy where risk is insurable, but selection determines the pool of individuals who take it up. First, we demonstrate that the comparative statics of these economies do not necessarily depend on its marginal selection (adverse versus favorable), but rather other characteristics. We then use repeated cross-sections of medical expenditures in the U.S. to understand the role of changes in the medical risk distribution on the fraction of Americans without medical insurance. We find that both the level and the shape of the distribution of risk are important in determining the equilibrium quantity of insurance. Symmetric changes in risk (e.g., shifts in the price of medical care) better explain the shifting insurance rate over time. Asymmetric changes (e.g., associated with a shifting age distribution) are not as important. View Full-Text
Keywords: risk sharing; medical insurance; adverse selection risk sharing; medical insurance; adverse selection

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Koch, T.G. The Shifting Shape of Risk: Endogenous Market Failure for Insurance. Risks 2017, 5, 9.

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