Asymmetric information - insurance markets, Microeconomics

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Q. Asymmetric Information - Insurance Markets?

In the United States, health insurance is usually provided for employees through contracts between the insurance company and their employer while individuals often search the conditions under which they would privately take out insurance quite unattractive. In how far does this point to an asymmetric information problem between insurance company and individual? Who could take out insurance contracts in a market in which contracting is only required directly between individuals and insurers? What is the basic advantage of a contract with an employer? Give an informal discussion.

Answer: There exists an asymmetric information problem if the insurer will not distinguish between individuals with different risk while the individuals themselves can. When offering a health insurance contract at the fair pooled risk premium, only bad risks can want to take out full cover and the insurance company does not break even. In equilibrium, full cover will only be offered at the fair premium for bad risks. Such contracts are unattractive for individuals who pose a smaller risk for the insurance company.


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