A Closer Look at Adverse Selection and Mandatory Insurance
1st July 2009
Bryan Caplan looks behind the handwaving.
If an economist wants to ward off the spirit of laissez-faire insurance policy, all he has to do is repeatedly chant “moral hazard and adverse selection.” The funny thing about this two-part mantra, though, is that the “moral hazard” part doesn’t do any of the work. Almost no one even pretends that governments do anything to mitigate it.
Bottom line: Real-world insurance regulation has little or nothing to do with economists’ “moral hazard and adverse selection” mantra. The “intellectual” bases of real-world regulation of insurance are rather populism and paternalism: Big bad insurers won’t cover people unless it’s profitable, and simple-minded consumers don’t care enough about their own health to pay for it themselves.
Contrary to e.g. Krugman, insurance isn’t a “special” market where laissez-faire doesn’t work. Instead, it’s a normal market where democratic politics doesn’t work, because both the public and economists remain wedded to populism and paternalism.