David McAdams: Adverse Selection

Tue, 12 Nov 2002 20:32:22 GMT

"Truck-School Loans Hit Rough Spot", WSJ November 12, 2002.

Securitized school loans for truck-driving school have unprecedented default rates of 70%. Why? (a) Adverse selection among truck-driving students? (b) Perverse incentives on part of truck-driving schools? and/or (c) Perverse incentives on the part of the loan consolidator (SFC)?

[Categories: Adverse Selection, Insurance, Moral Hazard]

Tue, 12 Nov 2002 20:22:48 GMT

"After Managed Care: 'Consumer-driven' insurance plans promise to unleash the power of the market on health care", WSJ November 11, 2002.

Consumer-driven insurance clearly seems designed to mitigate the moral hazard problem, that insurees will get more health care than they need. What about the adverse selection problem, that only the sickest insurees will be attracted to the plans with the most benefits?

"Other consumer-driven insurance plans give the insurers more money for sick enrollees." Will this policy align patients incentives to reveal their true health? Would you suggest corporate adoption of such a health plan?

[Categories: Adverse selection, Insurance, Moral hazard]

Tue, 12 Nov 2002 20:14:29 GMT

"The Best Car Deal Around: Never Paying for Repairs", WSJ November 12, 2002. [My assistant is out for the week; Apologies if articles are harder to read than normal.]

[Categories: Adverse Selection, Insurance, Moral Hazard]

Thu, 31 Oct 2002 20:45:32 GMT

"Chubb Extends Family Protection: Coverage for Kidnapping, Carjacking, Other Crimes To Be Rolled Out Nationally", WSJ October 23, 2002.

What would adverse selection and moral hazard mean with respect to family protection insurance? Who buys this insurance? Is there a significant adverse selection of families who purchase family protection?

This policy is only sold bundled with premium home owner's insurance. Is this important?

Why doesn't Chubb's policy cover ransoms? Explain why this would lead to an incentives / moral hazard problem that could make this coverage less profitable.

[Categories: Adverse Selection, Insurance, Moral Hazard, Price Discrimination (Bundling)]

Thu, 26 Sep 2002 18:41:30 GMT

"Membership is Losing Some of Its Priveleges: American Express Card Perks Under Scrutiny", WSJ, Tuesday September 10, 2002.

Why is the 2.95% MSC charged on corporate purchases higher than that charged on most non-corporate purchases?

[LINK: Market definition (1,2), market segmentation (10), incentives (18), adverse selection (19)]

Tue, 24 Sep 2002 23:03:29 GMT

"American Express Retires The Classic Green Card: Yielding to Demand for Miles, It Will Offer More Rewards, But Debit-Card Threat Looms", WSJ, September 24, 2002.

"Membership Rewards enrollees spend four times as much on their AmEx cards as cardholders who don't get points. So in an effort to entice all its cardholders to spend more liberally, the company decided to put every charge-card customer in its Rewards program." Are new Rewards program members likely to spend as much as existing program members?

Most challenging questions: Isn't AmEx better off under its old system offering two options (Rewards program and non-Rewards) since then it can price discriminate (through self-selection)? Explain why the following is possible: "As long as members are given a choice as to whether to be Rewards program members, the Rewards program will always be unprofitable (even with zero fixed costs). But if all members are automatically enrolled in Rewards, then the program will be profitable."

[LINK: demand substitutes (1,2), network externalities (7), self-selection schemes (11), moral hazard & adverse selection (18,19) & as source of "market failure" (19)]

Mon, 16 Sep 2002 20:04:11 GMT

"Insurance Issues Threaten Satellite Industry", WSJ September 10, 2002.

Among these three factors, which does the article suggest are the most and the least important in understanding the challenges facing the satellite insurance industry: (1) economies of scale, i.e. financial pooling; (2) adverse selection of insurees; (3) moral hazard / incentives of insurees.

[Categories: Adverse Selection, Costs, Insurance, Moral hazard]