Market for Kidnap Insurance

In the developing world, kidnapping is relatively common, and a market for kidnap insurance has arisen in response. We provide a model that allows us to analyze how kidnap insurance will affect the interaction between the kidnapper and the victim’s family when both are self-interested and have complete knowledge. We find that a market for kidnap insurance can be supported because it benefits a risk averse family, as long as the introduction of insurance does not increase the risk of kidnapping too much. Families should fully insure if purchasing insurance does not increase the probability of kidnapping, and partially insure otherwise. Kidnapping insurance allows families to redeem hostages from kidnappers who are more willing to kill, which will reduce the number of kidnapping fatalities as long as the insurance does not increase the risk of kidnapping too much.

That is from this paper by Alexander Fink & Mark Pingle, and it is forthcoming in Public Choice. 

Insurance coverage and agency problems (China)

I reread Arrow's 1963 classic article on uncertainty in the welfare economics of medical care, where he compares the health care industry with the hypothetical perfectly-competitive market. He talks about many things and one of them is the principal-agent problem. 

From a new published paper by Fangwen Lu (Journal of Development Economics, 2014) on that issue (ungated, here):

This study examines doctors' prescribing decisions using controlled hospital visits with randomized patient insurance and doctor incentive status. The results suggest that, when they expect to obtain a proportion of patients' drug expenditures, doctors write 43% more expensive prescriptions to insured patients than to uninsured patients. These differences are largely explained by an agency hypothesis that doctors act out of self-interest by prescribing unnecessary or excessively expensive drugs to insured patients, rather than by aconsiderate doctor hypothesis that doctors take account of the tradeoff between drug efficacy and patients' ability to pay.

"In China, doctors can pocket profits from selling drugs" (p. 2). 

Many of Arrow's ideas are valid today, but new technologies are changing the industry, and more changes are coming (think about rankings of doctors, and all the examples in Average is Over).

Classic article of the day (Health Care)

This article (1991) is wonderful to understand the historical relationship between technological change, insurance, and medical costs in the US. The title is "The Health Care Quadrilemma: An Essay on Technological Change, Insurance, Quality of Care, and Cost Containment" (Burton Weisbrond, Journal of Economic Literature). 

Notice that the historical trade off has been between more innovation and higher prices and less innovation and lower prices. The author presents a pretty interesting theoretical framework to understand the pricing mechanism in the health industry. 

The author's argument has important implication for other industries as well, such as education. In fact, you will see the high contrast in the way prices are determined in the health care industry vs. in education. 

The article stands out in the health economics literature I have read so far.  

Natural disasters and insurance (Vietnam)

. . . [H]ouseholds highly affected by weather volatility show a long-term risk aversion and are more willing to buy insurance to protect crop losses. The finding also supports the hypothesis that when people are used to live in a risky environment, an incremental increase in risk affects their risk preferences less.

That is the abstract of the working paper "On the Sources of Risk Preferences in Rural Vietnam" by Dang (October 2012).

Haiti comes to mind, its history of natural disasters is well known but insurance is not common. Haitians' average income might be too low to buy insurance. Another explanation is that the demand is there but the supply isn't.  

HT: Matthew Baker.