Michael Perelman wrote:
> The other term imported from insurance talk, adverse selection, has the most
> negative implicaions. The idea is that the people who buy insurance are the
> people
> who are most likely to need it. So insurance companies need to protect
> themselves,
> selling their "product" only to people who do not need it; e.g., don't give
> people
> who are health risks health insurance.
Looked at another way, the idea of adverse selection indicates that
the "Invisible Hand" drops the ball. (not enough fingers!) According
to the Invisible Hand theory, competition among profit-seeking
companies using the "price mechanism" serves consumers. But in the
case of adverse selection, the IH hands consumers lemons, ones that
are inadequate for making lemonade.
The fact that the insurance companies use the adverse selection theory
tells us that they will restrict coverage (using non-price means) to
those who are guaranteed to be well (in the case of health insurance).
The insurance pools thus get smaller and smaller, until the whole idea
of insurance (pooling risk) becomes risible. This suggests that what
we need is a unified and national health-insurance pool with universal
participation, without the insurance companies' screening out of
anyone who presents evidence of having any kind of prior record
(preexisting condition).
It's not that the theory of adverse selection is wrong. Rather, it's
how the theory is used.
BTW, the theory of moral hazard, as usually applied, is about
insurance encouraging people to act unsafely (and thus requiring
bureaucratic (and non-price) controls over those who pay for insurance
coverage by the companies). What this misses is that the problem of
AS is _bilateral_. It's not just the insured who "cheat"
(inadvertently or not). The insurance companies also cheat on the
contract, trying to weasel out of providing payment for insured
damages.
Insurance is not a market transaction. It's a struggle.
--
Jim Devine / "The radios blare musak and newsak, diseases are cured every day /
the worst disease is to be unwanted, to be used up, and cast away." --
Peter Case ("Poor Old Tom").
