CHAPTER 9 ADVERSE SELECTION: THE ROTHSCHILD-STIGLITZ MODEL
CHAPTER 9 ADVERSE SELECTION: THE ROTHSCHILD-STIGLITZ MODEL
Intro Previously,we studied: Demand for insurance Risk aversion but no information asymmetry Akerlof's market for lemons information asymmetry but no risk aversion The Rothschild-Stiglitz Model(1976)puts these two together. Bhattacharya,Hyde and Tu-HealthEconomics
Bhattacharya, Hyde and Tu – Health Economics Intro Previously, we studied: Demand for insurance ◼ Risk aversion but no information asymmetry Akerlof’s market for lemons ◼ information asymmetry but no risk aversion The Rothschild-Stiglitz Model (1976) puts these two together
The IH-ls space Ch 9 Adverse Selection:The Rothschild- Stiglitz model
Ch 9 | Adverse Selection: The RothschildStiglitz model The IH -IS space
lH-Is space Recall the income-utility space Take HE and SE points and bundle them to one point E(endowment point)in IH-Is space Point E shows the income of an individual in both the healthy and the sick state U Is SE E SE He pnattacnarya,myae ana iu-HealthEconomics
Bhattacharya, Hyde and Tu – Health Economics IH -IS space Recall the income-utility space Take HE and SE points and bundle them to one point E (endowment point) in IH -IS space Point E shows the income of an individual in both the healthy and the sick state
lH-ls space Point C represents a partial insurance contract Horizontal shift=premium(r) Vertical shift payout if sick(q-r) U Is q-r E SE SE Sc →H Hc HE pnattacnarya,myue and iu-meaitnEconomics
Bhattacharya, Hyde and Tu – Health Economics IH -IS space Point C represents a partial insurance contract Horizontal shift = premium (r) Vertical shift = payout if sick (q-r)