Michael Hoy

The value of genetic information in the life insurance market

This paper analyzes the effects of additional information in a life insurance market under adverse selection. It is shown that individuals have an incentive to acquire information about their risk type if their informational status cannot be observed by insurers. In aggregate, the existence of a testing opportunity has an effect on the equilibrium premium. We describe the conditions under which, from an ex ante standpoint, all individuals gain, all lose or in which some gain and some lose from the existence of the test.

Measuring Lifetime Poverty

This paper presents an axiomatic framework for measuring lifetime poverty over multiple periods. For an individual, we argue that lifetime poverty is influenced by both the “snapshot” poverty of each period and the poverty level of the “permanent” lifetime consumption; it is also influenced by how poverty spells are distributed over the lifetime. We axiomatically characterize classes of lifetime poverty indices and derive dominance conditions of poverty orderings for both individual and societal lifetime poverty measurements.

Flat rate taxes and inequality measurement

Abstract Tax flattening exercises which include an increase in personal allowances have been pervasive over the past two decades. Such changes, which typically benefit both the poor and the rich, at the expense of the middle class, have complex redistributive effects which are not obviously ‘equalizing’ or ‘disequalizing’. We develop a systematic approach to comparing the relative inequality of flat rate tax schemes to conventional graduated rate taxes. We provide an illustrative example using 1993 U.S. taxfiler data.

The value of screening mechanisms under alternative insurance possibilities

Abstract This paper investigates the welfare implications of symmetrical improvements in information and accompanying screening mechanisms which allow for improved matching of individuals to their respective risk classes. Unlike previous models used to investigate this phenomenon, this paper allows for the possibility that individuals differ not simply according to exogenously specified unequal loss probabilities, but rather that individuals possess different self-protection technologies. Moreover, various insurance contracting possibilities are also considered. It is demonstrated that the structural form of the heterogeneity of technologies and the type of insurance contracts available in the market determine in an interactive way the value of information which improves the matching of individuals to risk class.

East--West joint ventures and buyback contracts

Abstract Contractual joint ventures (CJVs) and the buyback form of countertrade are popular methods that Socialist countries use to attract foreign investment. In this paper we explore some reasons why this is so and also explain two predominant characteristics of these contracts: the existence of sharing rules and minimum standard requirements on inputs. The model stresses the incentive problems involved when a (Socialist) host country, which does not allow foreign direct investment, uses a CJV to obtain the fruits of some knowledge-based production process from a multinational enterprise.

Squatters' Rights and Urban Development: An Economic Perspective

Up to 35 percent of urban dwellers in third world cities are squatters. The characteristics of the squatting phenomenon are both varied and puzzling. Of particular interest are the observations that (1) landowners often do not collect rent from squatters for use of the land and (2) costly evictions are sometimes used without subsequent development of the land, which in many cases is resettled by squatters. The authors present an economic model of landowner-squatter interaction which is consistent with these observations. This model is then used to enlighten certain aspects of socially optimal land management policy for squatter areas. Copyright 1991 by The London School of Economics and Political Science.

Regulating Genetic Information in Insurance Markets

The debate on whether insurance companies should be allowed to use results of genetic tests for underwriting purposes is both lively and increasingly relevant as both technology and lawmaking efforts are progressing rapidly. In this article we outline the primary economic and non-economic arguments made in favor of and against allowing insurers to risk-rate premiums on the basis of genetic test results. While economic analysis has much to offer in enlightening this debate and informing policy makers, we argue that such work must be cast within the overall perspective of the genetic testing debate. Moreover, despite substantial strides by economists in understanding the role of information in the way insurance markets operate, much work still needs to be done in order for economic analysis to be confidently applied to the looming social issues of the continuing genetic revolution.

Co-existence in Selected Mixed Arab-Jewish Cities in Israel: By Choice or by Default?

In this paper, we use a data-set based on a survey of the perceptions about co-existence between Arabs and Jews as held by the inhabitants of five mixed Arab-Jewish cities in Israel: Acre, Haifa, Jaffa, Lydda and Ramla. Our main purpose is to determine the relative importance of various factors which contribute to the level of satisfaction with co-existence in Israel as perceived by the inhabitants themselves. Our choice of explanatory variables is motivated by a consideration of issues relating to the specific historical context of Jews and Arabs living together in these cities; and, an awareness of more general sociological considerations which may bear on the degree of satisfaction with co-existence. Our empirical analysis suggests that the variables relating to the specific historical evolution of Arab-Jewish relations-especially in the context of the urban setting-have the greatest explanatory power in understanding perceptions of co-existence. Basic sociological factors also hold some explanatory importance.

The Impact of Genetic Testing on Healthcare Insurance

The article discusses the potential impact of the diffusion of genetic testing on healthcare insurance markets. It refers to the theoretical approaches respectively proposed by Rothschild and Stiglitz (1976) and Wilson (1977, 1980) about insurance market equilibrium with adverse selection due to asymmetries of information about individual risks. The article shows that, in such contexts, a market equilibrium can be reached either on the basis of separating contracts discriminating between risk levels or of pooling unique contracts based on the average risk in the population, and that the choice of this alternative depends on an empirical parameter: the effective proportion of “high-risk” individuals in the population. An application to the case of genetic risk of breast cancer, the most emblematic advance in practical application of genetic testing in recent years, confirms that, due to the limited incidence of the gene mutations associated with a higher risk in the general female population, a pooling equilibrium would be obtained. These results suggest that current alarmist claims that diffusion of genetic tests in medical practice will inevitably increase adverse selection and inefficiencies in health insurance systems if the use of this information to establish insurance contracts is banned (either because compulsory universal health insurance excludes separating contracts by essence, or by current legislation banning the use of genetic testing by private insurers) are rather overstatements.

Genetic Screening and Price Discrimination in Insurance Markets

Basing insurance prices on the results of an imperfect screening test to identify risk types can reduce or increase aggregate discrimination across insureds. We present a powerful and general new framework of analysis to examine this issue, drawing upon recent work which uses decomposable inequality indices to measure vertical and horizontal inequity in taxation. We find that, whilst improved test performance inevitably reduces vertical discrimination (in the average prices faced by different risk types), even very accurate tests can lead to substantial horizontal discrimination (within risk types) and enhanced overall discrimination. These conclusions are shown to be robust to a range of different value judgements about how to aggregate individual discriminatory effects and to be particularly relevant to the case of genetic screening.