Discussion Paper Details

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Title: Choice in Insurance Markets: A Pigouvian Approach to Social Insurance Design

Author(s): Nathaniel Hendren, Camille Landais and Johannes Spinnewijn

Publication Date: September 2020


Programme Area(s): Industrial Organization, Labour Economics and Public Economics

Abstract: Should choice be offered in social insurance programs? The paper presents a conceptual framework that identifies the key forces determining the value of offering choice, reviews some existing evidence on these forces, and aims to guide further empirical research in different insurance domains. The value of offering choice is higher the larger the variation in individual valuations, but gets reduced by both selection on risk and selection on moral hazard. The implementation of choice-based policies is further challenged by the presence of adverse selection and choice frictions or the obligation to offer basic uncompensated care. These inefficiencies can be seen as externalities, which do not rationalize the absence of providing choice per se, but point to the need for regulatory policies and the potential value of corrective pricing à la Pigou.

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Bibliographic Reference

Hendren, N, Landais, C and Spinnewijn, J. 2020. 'Choice in Insurance Markets: A Pigouvian Approach to Social Insurance Design'. London, Centre for Economic Policy Research.