Adverse Selection In Group Insurance:
The Virtues of Failing to Represent Voters
Robin Hanson
Abstract
Compared with non-union workers, union workers take more of their compensation
in the form of insurance. This may be because unions choose democratically,
and democratic choice mitigates adverse selection in group insurance. Relative to
individually-purchased insurance, we show that group insurance chosen by an ideal
profit-maximizing employer can be worse for every employee, while group insurance
chosen democratically can be much better. The reason is that democracy can fail to
represent the preferences of almost half the group.
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