Question

How can the concept of signaling and averse selection be used to understand the issues facing the health insurance market?

What are possible solutions to these problems?

Answer 1

The idea of adverse selection is that there is imperfect information between buyers and sellers. In the health insuurance market for instance it is not possible to know who the worthy buyers of insurance are. Given this we have asymmetric information. In such a situation it is possible for insurance sellers to select the wrong people to insure and so this causes a problem of moral hazard later on. The solutions to this issue is not simple. There needs to be careful background checks of those who are being insured. This will act as a useful signalling tool for insurance companies to know which are the insurance profiles to accept and which to reject.