The Division of Labor Between Private and Social Insurance



This contribution starts from the observation that the past decades have seen a substantial change in the division of labor between private (PI) and social insurance (SI), to the advantage of the latter. The efficiency view of SI (to be expounded in Sect. 37.2) explains the existence of SI with the market failures of PI, namely moral hazard and adverse selection. In Sect. 37.3, a benevolent government is introduced that seeks to determine the optimal division of labor between PI and SI. However, moral hazard effects are found to plague SI at least as much as PI, while the empirical relevance of the adverse selection argument has recently been challenged. In Sect. 37.4, the exposition therefore turns to the public choice view, which emphasizes the interests of risk averse voters even with below-average wealth in redistribution through SI. This view predicts a crowding out of PI by SI also in markets without adverse selection, which has been observed. Section 37.5 turns to normative issues by proposing a test that indicates whether and in which lines of insurance the division of labor between PI and SI could be improved. The final section, Sect. 37.6, offers concluding remarks and an outlook on future challenges confronting both PI and SI.


Social Insurance Private Insurance Marginal Utility Moral Hazard Adverse Selection 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.



Suggestions and criticisms by three anonymous referees (especially by one who was particularly helpful) are gratefully acknowledged.


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Copyright information

© Springer Science + Business media, New York 2013

Authors and Affiliations

  1. 1.Emeritus, Department of EconomicsUniversity of ZurichBad Bleiberg (Arabia) ZurichSwitzerland

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