THE ZERO-PROFIT LINE Ch 9 Adverse Selection:The Rothschild- Stiglitz model
Ch 9 | Adverse Selection: The RothschildStiglitz model THE ZERO-PROFIT LINE
The zero-profit line Represents the set of a possible zero-profit line contracts such that the premium is exactly the same as the expected payout(no profits for insurance company) C2 Zero-profit line runs through ● C3 endowment point E E Also can be thought of as the actuarially-fair line H Bhattacharya,Hyde and Tu-HealthEconomics
Bhattacharya, Hyde and Tu – Health Economics The zero-profit line Represents the set of contracts such that the premium is exactly the same as the expected payout (no profits for insurance company) Zero-profit line runs through endowment point E Also can be thought of as the actuarially-fair line
The zero-profit line divides ly-ls space into profitable and unprofitable zones s unprofitable zone ▣ C,lies below the zero-profit line and results in profits for insurance companies 口 Ca lies above the zero-profit line and results in a loss of C2 money for companies No company will offer points above zero-profit E line Will customers be willing profitable zone to take something below Hc He the zero-profit line? Bhattacharya,Hyde and Tu-HealthEconomics
Bhattacharya, Hyde and Tu – Health Economics The zero-profit line divides IH -IS space into profitable and unprofitable zones C1 lies below the zero-profit line and results in profits for insurance companies C3 lies above the zero-profit line and results in a loss of money for companies No company will offer points above zero-profit line Will customers be willing to take something below the zero-profit line?
THE FEASIBLE CONTRACT WEDGE Ch 9 Adverse Selection:The Rothschild- Stiglitz Model
Ch 9 | Adverse Selection: The RothschildStiglitz Model THE FEASIBLE CONTRACT WEDGE
The feasible contract wedge R,overfull insurance Get more income if you are sick Is (implausible contract) R,under indifference curve going through E Individual prefers E to any R1 full-insurance line contract offered in this region R3=northeast of zero-profit line Ra Companies will lose money on zero-profit line these contracts F=feasible contract wedge Only area where both customers R2 and insurance companies want to meet H Bhattacharya,Hyde and Tu-HealthEconomics
Bhattacharya, Hyde and Tu – Health Economics The feasible contract wedge R1 = overfull insurance Get more income if you are sick (implausible contract) R2 = under indifference curve going through E Individual prefers E to any contract offered in this region R3 = northeast of zero-profit line Companies will lose money on these contracts F = feasible contract wedge Only area where both customers and insurance companies want to meet