Statistical Discrimination - Question And Answer

Question1. (Statistical Discrimination) (20 points)


1. Suppose that a fraction ? ? [0,1] of the workers invested in skills in stage 2. Please derive the firms’ optimal task assignment rule and wage policy in stage 3. [Hint: the task assignment rule is still a threshold rule. Workers will be paid according to their expected productivity in their more productive task.]


(MLRP) l (?) fq (?) / fu (?) is increasing also continuous in ? where all ? ? [0, 1].

In this equation we observe that the https://quillbot.comAssumption given is except lack of generality: we always rank some fq and fu distribution pairs, with the fq ratio of signals fq (?)/fu (?) and rename the signals according to their ranks. If we can see, there are two repercussions for the MLRP inference. First, it means that trained employees, workers who have invested in qualifications, obtain greater signals than professional workers; and second, that the later possibility of an employee getting a degree is the same as increasing in the workplace. 

This is the timing of the game. If we speak of stage 1, the essence attracts the categories of workers, namely the costs they have of investment skills (c) from the distribution of G (•); the competence investment choices are made, after having observed their form c, in stage 2, and are not perfectly respected by the companies; rather the companies observe a typical test outcome ?? [0, 1] fq (•) or fu (•) totally contingent on the investment judgement of the workers. 

2. Given the firms’ optimal response to ? in stage 3 derived above, write down the function that defines the workers’ skill investment incentives.



From the previous point, the equilibrium of this model can be resolved. At this level, expect the decision to appoint the first company. Suppose the business has a staff with a signal ? from a party with the capacity to invest a fraction of ?. The subsequent chance, called p (?; ?) after such a worker, is based on Bayes' theorem.





This new formula, however, defines an important understanding: conflict of knowledge in places (because investment decisions of employees are not directly determined by firms), firm evaluation of the suitability of a particular employee with a test mark depends entirely on their increase in the segment of the group to invest in skills, i.e., ?. This not only increases the likelihood of an employee making the highest signals and predicted higher salaries, it is also rising all pre-employees from the same group. In this model, these external knowledges are the basis of equity k?.


In Stage 3 of a worker with a test signal ? that belongs to a category in which a fraction of p has invested in skills, consider the job judgement of the firm: the company's expected benefit is that such a worker would be given to the complicated task. 


So, the worker is eligible to have probability p (?; ?) and will establish Xq for the business but, if he is given the difficult job, he is unqualified resulting in loss of Xu with probability of 1 _ p (?; ?). If the employee has a basic mission, on the other hand, the benefit of the organisation is 0. The organisation then agrees to appoint such a dynamic employee accordingly to Stage 3 if and only if:



Using the expression (4) for p (?; ?), (6) is true if and only if:


3. Explain how the MLRP property impacts the workers’ incentive to invest in skills.

The MLRP assumed that fq/fu is increased monotonously in y, (7) if and only if ? ? ? ?(?) presentation prescribed in the following is defined with threshold ? ? (?) prescribed in y (prescribed in the following section) is calculated. Where the equation is:




Has a solution in (0, 1), then (?) is the unique solution (where the uniqueness follows from the MLRP); otherwise, ? ?(?)=0




It is also clear that whenever the threshold ? (?) ? [0, 1]. We have


Where l (?) -fq (?)/fu (?). That is, as previous job prospects become higher, firms use a lower signal limit to give the employee a harder job.


4. using your answer to (2) above, describe the workers’ optimal skill investment rule in Stage 2.


We analyze the overall decision of employees to invest in Stage 2, when given the rational performance of the firms in Step 3 as mentioned above. Suppose that businesses pick a work assignment in compliance with the cutting rule in ? ?. If a cost c worker wishes to invest in skills, a complicated position that is paying is likely to be provided> 0, possibly 1 - Fq (? ?) in which the appropriate employee will receive the above ? ? (note that Fq is the CDF for fq). So the expected benefits of investing in Stage 2 skills are:



Unless he invests in expertise, however, this signal will surpass ? ?, so the dynamic job with likelihood is erroneously allocated 1 - Fu (? ?) (recall that Fu is the CDF of fu). So the expected benefits of not investing in skills are:



Therefore, an employee with a cost c will only invest if: 




The term equation 12 denotes the benefit, or incentive, of the worker’s skill investment as a function of the firms’ signal threshold ? in the task assignment decision. A few observations about the benefit function I (.) can be useful. Note that:




If, and only if l (? ?) < 1 xss=removed>

5. Define the equilibrium of the model.


Provided the optimum investment law for the employee in response to the allocation threshold ? of companies (12), the percentage of employees who rationally invest in talents that have been cuts is merely an indicator of the labour whose investment costs (c) are lower than I (total), i.e.



Figure 1 incentives to spend in willingness to minimise the amount of funds allocated to the public as a cut-off ? ?. An equilibrium of the game is such a pair for every j,  





Where ? ?(.) and G (I(.)) are defined by (8) and (14) respectively. Equivalently, we could define the equilibrium of the model as which satisfies:


From the definition of equality, we see that the only way to measure equality is to discriminate

The result of black and white is where the above equation has many solutions.

6. Provide intuition for the possibility of multiple equilibria in this model.




The presence of a tonne of equilibrium is not always proven and relies on I and G composition. This can be proven by adapting all the fq, fu and technical parameters xq, xu, w to achieve the acceptable cost distribution G in a way which provides multiple solutions for the device (15) - (16). Note that because G is a CDF, the debate is growing. The right side (16) is also a monotonous alteration of (13). This implies that at the beginning, at least in the y- width close to 0, the feature (16) should increase and then decrease at least in the y-width near 1.


A host of G functions can be found which ensure many balances. Remember, for instance, that all workers have zero or successful savings, so G (0) = 0. In this case, the trivial balance of ? = 0, ? = 0, ?~ =1 still occurs. Select y0 2 (0,1) and measure p0 by inversion (15) in order to guarantee the presence of at least one internal balance (13). If the costs in p0 are below or equal to I (y0 then p0 is a balance and the number of distributions g satisfying this condition is infinite. There are also a number of distributions G. Using the same logic, G features compatible with more than one inner balance may be constructed. This is seen in Figure 2 where we drew if the ?~ magnitude of the curve G (I(.)) is greater than the opposite of the curve ?~ (.).


When groups choose Equation (17) solutions, th (?~) will demonstrate different balance between human resources, employment, and the average incomes, while the underlying values of investment costs and information technology will be similar.


    Figure 2 multiple equilibria.

7. Prove that, if there are multiple equilibria in this model, th (? ?) are Pareto-ranked. 



Coate and Loury find out that the rational interpretation of their paradigm is mathematical discrimination. Discrimination against this model can be considered as a weakness of relation. Equilibriums in this model are also seen by Pareto, as it can be shown that both employees and businesses tend to be in a position to invest in talents by more workers. Community discrimination will be reduced if blacks and corporations can somehow come together in order to promote justice. Most notably, the option of equality would not interfere with the interest of white and black: whites will not be influenced by the blacks to boost equality. However, this paradigm is not limited to productivity requirements since salaries are higher.

8. If we interpret statistical discrimination as the two racial groups being coordinated on the different equilibria of the above model, what are the consequences of the linear production function assumption as in Table 1 on affirmative action policies such as employment quota?


Coate and Loury (1993a) analyzed how the act of confirmation in the form of an employment allocation could affect investment benefits in both party capabilities and model equity. In particular, it highlights the potential impact of the deviation from the act of consent: in the so-called "equality equality," the benefits of investing in skills by group. Employees - a group that should reduce the policy of equality in the affiliate action without the consent act.


9. If instead of the linear production function as in Table 1, we assume a Cobb-Douglas production function as in Moro and Norman (2004): y (C,S) = C S where C and S are, respectively, the qualified skilled workers assigned on the complex task and the workers assigned to the simple task. How would this change the nature of the discriminatory equilibrium?



Model with productive coherence and competitive wage Moro and Norman (2004) loosened the most important assumptions that ensure team differentiation in Coate and Loury's model: equity of production technology and wage stability. As Th (? ?) expanded Coate and Loury's framework by considering common technology.


For their output the model is established by y (C, S) in the sense that S is the majority of the workers in this straightforward role, and C is the number of skilled staff allocated to work hard, and quasi focus firmly, showing a steady return and fulfilling Inada's requirements, making both significant. We use xq (C, S) and xu (C, S) as separate materials, as defined by Section 3.2.for a suitable job for hard work, as well as any work employed in this simple task, now in the integrated input. Now we show the balance in this model. 


The Bayesian Nash equity game list includes a staff decision to invest in individual prices c, firm rules of operation, and schedule schedules for each player to develop themselves against the strategy profiles of other players. It can be pointed out that the right job offer is a law of delay Nearly everywhere, when workers are working in hard labour just over (don't worry) j, j = B, w. Note that party shares are denoted with the following lambda j, j = B and W inputs:




The limits should be determined jointly by both parties, because the values ??of xq and xu are based on the rules of both parties' allocations, given the combined investment of both parties ?j. Provided by.


It shows that the C / S factor ratio increases independently for every group's share of investors. To see this, note that the right side (18) descends as the j rises. The only way to follow the first order is to reduce (? ?) j, regardless of the monotone ratio characteristics that can be taken with fq and fu on the left side to (? ?) j. However, the factor scale raises the contradiction if all (? ?) j go down, and the pj goes up. To recognise the impact on the investment incentives of the company for people, be aware that the motivation for investing in Coate and Loury may increase or decrease only in value (? ?), because wages are set sharply. Moro and Norman instead received equal pay as a result of 148 firms Hamming Fang and Andrea Moro Author a competing copy of the workers.

Figure 3 Salary as a signal function j.

The solution can be seen to equate to a wage equal to the output required of virtually all y 2[0, 1], i.e.




Figure 3 shows wj (y). Note that the value of the signal (? ?) j is the ratio of the products to two functions, because a word multiplied by xq (C, S) is the probability that an employee with a ? signal is qualified (see figure (4)).

10. What is the difference between economic discrimination and statistical discrimination? Do the models above exhibit economic discrimination? Sketch an idea where economic discrimination may be sustained in an equilibrium model.


Economic discrimination

Economic discrimination is a concept that has no direct meaning. Another difficulty is that the intended meaning of the word varies from case to case. To define economic discrimination go a step further and start with two problems that include a wide range of interests and economic expertise, from practical to practical.


 (1) The apparent problem, which is based on perceived and numerical results in economics and deep concern for society as a whole, wide disparities in wages, wages, and wages between different groups, divided by gender, race, nationality, and other factors. Diversity is orderly, persistent, and viewed by many observers as unparalleled, although the definitions and sources of inequality are often contradictory.

In short, I will refer to a group that suffers from low economic rewards as a "minority" group and a popular group as a "minority" group. The fact that discrimination, in the sense of different outcomes and inequalities, is alleged to affect many different groups is complex in its meaning and makes the review of dynamic work even more difficult.

Statistical discrimination

In statistical discriminatory models, the use of group identity as a representative of the corresponding variables is the appropriate information response of the information seeker, each reasonable agent. Performance considerations are therefore very relevant to such environments, along with a brief textbook, have been developed to include different sources of statistical discrimination inefficiency. It varies considerably from Becker models of segregation, which do not pose a problem with performance. In models where discrimination derives directly from expectations, the use of a category is limited ownership creates inefficiency, at least directly.

An idea where economic discrimination may be sustained in an equilibrium model

The same results contribute to the equitable mathematical discrimination models analysed in paragraphs three and four: effective personnel distribution in the working area and the role of missing information non-information operations. Efficiency can also depend on the cost of human investment and the role of relevant factors in production depending on the technology process.

Efficiency of discriminatory equilibria Considering the case of the equilibrium model 


In Moro and Norman (2004) on specific technology, where discrimination is caused by a failure to connect (see Section 3). Note that the balance is set in Pareto. For this reason, a model of a group of workers demonstrating two stages of spending in human resources, ?1> ?2. Below ?1, y-related earnings are much less than the minimum amount of spending in human capital ?2.

Therefore, all workers who are not investing and/or similarly investors are better off at the higher investment cost, so they have higher predicted profits that can be measured by integrating equitable distribution with (3). There are a variety of workers who do not spend under ?2, but invest under to 1. To ensure they're better, remember that the benefits must outweigh losses so they choose to spend, i.e.



The left side, however, should be greater than the expected income of non-investors below ?2







That is, these employees also strongly prefer a higher investment balance. Therefore, responsibility among groups means that discriminatory equity doesn't work well regardless of unity of output. When the product shows compliance, due to the effects similar to those shown in the model shown in the problem of editors, we assume that it is possible that the benefits of the whole Pareto group could be due to the discriminatory balance associated with symmetric equilibria.

Question2: Distinguishing Prejudice from Statistical Discrimination (20 points)

1. Explain the difference between action-based vs. outcome based tests for prejudice vs. statistical discrimination.


Prejudice discrimination

A person who is prejudiced may not be inclined to follow their attitude. Therefore, one can be discriminated against in a group but not discriminated against. Also, prejudice involves all three aspects of attitudes (affecting, moral, and understanding), whereas prejudice is simply a matter of behaviour.

Discrimination is actions or actions, sometimes negative, directed at a single or group of people, especially on the basis of gender / race / social class, etc.

For example, the initial bias of a racial interview may be passed anonymously to the person you spoke to in such behaviour by cutting the conversation short-term or staying too https://quillbot.comfar from the interviewer to directly communicate the difference (Darley and Fazio, 1980; Word et al., 1974). Such dishonest animosity guarantees justice. In law cases verbal and physical therapy is also used as signs of bigotry. In comparison, whether they are up to the level of establishing a toxic workplace atmosphere, they may be unnecessarily racist.

Avoidance involves choosing the luxury of a personal group ("group" in terms of social status) by associating with another ethnic group ("outside party"). In case of voluntary communication, that is, where people can members of historically disadvantaged races will opt to be affiliated or not to be segregated. People may identify themselves by race in social contexts. In the case of employment, a strong contact can lead external team members to conduct low-level roles, or minimise the behaviours of others that were removed from informal networks (Johnson and Stafford, 1998).

Becker (1971) explains the old theory that racial laziness - called “racism tastes” - can impact labour markets and wages (more complex forms of this model are offered by blacks, 1995; Borjas and Bronars, 1989; Bowlus and Estein, 2002). Laboratory experiments assessed avoidance by measuring the ability of people to invest time and no time in a certain region (Talaska et al., 2003). Social research measured avoidance by reporting or observation of social media contexts (Pettigrew, 1998b; Pettigrew and Tropp, 2000). In legal cases peculiar contact avoidance can appear as proof of intent of the hostility.

Avoidance may seem harmless in any particular situation but, when collected in all cases, can lead to prolonged expulsion and separation. It can be especially challenging in situations where social networking sites are important, such as employment and promotion, schooling and access to healthcare. Any other human can be malicious as efficient and transparent misuse depending on race.

Separation takes place as citizens consciously participate in the distribution of services and access to institutions for members of a racially deprived community. The most frequent examples are the denial of equal schooling, families, work and racial health care. 

Most Americans (approximately 90 per cent in recent research; Bobo, 2001), favour equal opportunity legislation in this area. However, the remaining 10% who do not endorse civil rights of both races are prone to be deliberate and obviously racist. The data indicate that those who discriminate strongly against them consider their party as endangered by foreign races (Duckitt, 2001).


In their search for "traditional" values against dissident immigrants, they treat this challenge as an economic, unregulated and price-based game. In comparison, even 90 per cent of those reporting equity law help demonstrate no support if such solutions Discriminatory supporters also perpetrate physicist assaults on minority classes (Green et al. 1999) and struggle with other kinds of prejudice (Schneider et al., 2000). Hate crimes are closely related to overt exposure which stem from alleged challenges to the financial standing and methods of the party (Glaser et al., 2002; Green et al., 1998; for a review of hate crime cases, see Green et al., 2001).

Genocide or genocide based on race or ethnicity takes place. In addition to the forms of animosity and bigotry mentioned above, there are also systemic prejudice and discrimination, challenging living environments, rigid (and racist) leadership, group response of violent activities, and openly-discriminated alliances.

Statistical discrimination

Another process known as statistical discrimination and profiling, which may lead to the detrimental implications of discrimination against members of a poor racist race. In this situation, a person or a corporation uses absolute trust in a group to settle about an individual from that group (Arrow, 1973; Coate and Loury, 1993; Lundberg and Startz, 1983; Phelps, 1972). The traits of the visual community are known as appropriate. Therefore, if an employer assumes that people with history of a criminal crime would hires unsatisfactory jobs, believes that black people have more criminal records than white people on average, and are unable to check the criminal record of the applicant personally, the employer can judge black applicants on average. Not only on the basis of his skills. 

Where sectarianism is based on racist beliefs based on outright prejudice or other subtle forms of discrimination within the group, then the racial category is inseparable from the apparent biases described above, based on these views. Cases of prejudice based on views representing true dispersal characteristics of the various groups are statistical discrimination or printing, clearly described. While prejudice can be perceived to be economic, in cases like jobs it is unconstitutional, because it requires party elements to vote about individuals.

Why use stigma from bosses or other policymakers? In cases with insufficient knowledge, as is always the case, there are incentives for statistical discrimination. For starters, only a few pages of personal information are given to candidates, work applicants will be evaluated on the basis of a single page or short interview, and airport security officials will see only external visibility. In these situations, the decision-maker must determine, on the basis of very limited observations, a range of uncertain considerations like initiative, intellect or purpose.

Why in certain situations is information limited? The decision-maker prefers to look for personal claims which are unreliable (e.g., "I'm going to work hard for my job" or "I'm not an activist"), so people that are not truthful to them may quickly make these statements. Instead, decision makers prefer signalling that is not quickly installed and is connected to the signals the decision maker wishes to receive. Training is a prime illustration.

If an employer reviews the validity of the credentials of a job candidate and finds that he or she has an undergraduate degree and an average of 4.0, the employee may have an established record of integrity and hard work. This material is impossible to "deceive" (without lying directly about an individual's research details), since such a record has to be compiled.

However, only the specifics should be passed forward, and certain facets of the background and credentials of an individual are impossible to record, even though they have to be truthful. Decision makers should then still determine what they know about individuals and whether to engage in more information (Lundberg, 1991). When confronted with incomplete data, they may have information on the differences in the middle group symbols related to the desired features. 

The consequence is statistical discrimination: regardless of the details correlated with membership of his or her ethnic group, the person is viewed accordingly.

Members of the poor faced with statistical inequality races may behave in a way that reflects their differences within the party. For example, non-white entrepreneurs who want to show their loyalty and that they belong to the business world can dress seamlessly with expensive business suits. White parents who wish their children to attend first-grade college will demonstrate the history of their middle class by sending their children to private school. The results of statistical segregation are that members of the apartheid party, split into categories, can need to be more eligible than non-Spanish white people in order to succeed (Biernat and Kobrynowicz, 1997). Statistical discrimination will also cost target group members even though those people themselves are not victims of transparent discrimination.

In addition, Statistical discrimination can persist and present findings can influence potential behavioural triggers statistical discrimination (Coate and Loury, 1993; Loury, 1977; Lundberg and Startz, 1998). Where admission managers at higher colleges assume that such classes are less likely to excel and therefore allow less members of these groups, it may be possible to minimise the opportunity for the next generation to try harder and to learn the requisite skills to get admission (see Loury, 2002).: 32-33, to address this example in greater detail). In the same way, the opportunity of young men and women to obtain college credentials and job experience leading to higher jobs may be curtailed where highly-profile corporate employment is omitted for Black Americans. Statistical inequality can also contribute to the care of all vulnerable participants not focussing on their strengths. If the deprived community expect such injustice, it will affect short-term and long-term results.

2. What is the infra-marginality problem associated with the outcome-based test for prejudice vs. statistical discrimination?


Assume that the police detained people while searching for drugs and they fell under one of the four groups of Black and White people they found on the street. First and foremost, there are people who show no signs of drug abuse. Suppose 1% (or 0.01 as a possible fraction) of the opioid users in this group. Secondly, people demonstrate a strong movement as they encounter the police. Suppose 10% of these persons are pregnant. Thirdly, women smell marijuana, with 20% of them pregnant.

Finally, there are both people who show dominant movement and smell like marijuana. Suppose 50 percent of the suspects you meet show these two external signs with drugs. These four categories of people and the corresponding opportunities carried by the randomly selected person in each group are summarized in the first two columns of the table below.


External Signal of Carrying Contraband

Probability of Carrying if Exhibiting Signal

Distribution of Encountered Black Suspects with Signal

Distribution of Encountered White Suspects with Signal

No Signal




Furtive Movements




Marijuana odour




Furtive Movements & Marijuana odour





Implied Hit Rate






Suppose that 70 percent of the blacks and whites who approached the police show proof of abductions and 15 percent show only offensive moves. Thus 85% of the individuals displayed no evidence of bearing in each group and were of the same size as the group that showed external symptoms. However, imagine black offenders are already strongly split into the most accused group amongst the remaining 15 per cent. The scenario in the table assumes that only the remaining 15% of whites detect pot. Of the remaining black offenders, 10 percent are expected to be classified as "marijuana smelling" and 5 percent are categorised as external signals: marijuana smelling as well as action brave. Distribution in these groups means the height of the Black people; that is, the risk of being unlawfully arrested by randomly stopping a black person is larger than that where a white person is rarely detained. This discrepancy is entirely motivated by a slight difference in the number of people in the top two categories (note that the distribution of the four categories is equal to 95 percent of both groups).

Now let's say the police suspension decisions are racist in the following way. Police stopped and searched all the Black people who showed up signal with very high charge. They stopped and searched all the white people who smelled of marijuana or both who smelled of marijuana and showed sensible movements. That is, for Black people, the police use less evidence than for white people. In this case, 15 percent of White people were detained by police and weed smelled from all White people who were suspended and searched. Due to the assumptions seen in the table, the rate of consensus predictions is 20% (the chances of carrying people showing this signal).

In contrast, police are detaining 30 percent of Black people because of the low level of evidence. However, the composition of the suspension varies according to the administrative opportunities. One-third of Black people suspended and searched show only mangy movements, one-third of those who quit smell of marijuana, and one-sixth of those who stop show dominant movement and smell of marijuana. The beat rate for the search for Black suspects will be the average beating rate for these three groups, calculated as 1/2 (.1) + 1/3 (.2) + 1/6 (.5) = 0.20. 

Therefore, with the exception of the differential treatment of Black people, the rate of Black beatings based on this model is equal to the level of beatings of White standing. The outcome analysis used in this case will fail to find any discriminatory difference in the level of evidence of standing.

The dilemma of infra-marginality is based on the fact that the average rate of scoring on the average person is not equal to the amount of scoring on the search line by individuals. For instance, white persons searched tend to be in the category of "smelly marijuana," and thus the overall incidence is only above the line of evidence drawn by police, showing the extent of group beatings.

However, the dominant movement is attracted to the Black people in our example of defining the facts. In this early and literary contribution to these books Knowles, Persico, and Todd (2001) tackled the issue of infrastructural marginality by presenting a theoretical model in which search and trafficking rates are calculated. The average rate moderates the conduct of an odd group of accused individuals, including the beatings of people with very low rates of black-searches. 

A main trait of the theoretical paradigm is that they assume that officials should still make 100% more possible by concentrate on aggressive efforts at a specific faction, a circumstance that obliges all officers and those accused of "integrated tactics." This formula essentially measures the chances of being shipped by the expenses of the officers who are chasing the perpetrator and the likelihood of pursuit by the minimal advantages of delivering the waste to the party. Bias is implemented in this type for Black criminals at reduced cost and a lower ranking for search agents of Black Citizens to allow incomplete identification of citizens at a low level (deceptive only movement) and to infect suspects in infra-marginal sectors (smelling marijuana and both they smell like marijuana and show strong movement.

3. Consider the case of racial profiling in motor vehicle searches. Describe how the infra-marginality problem is solved, or partially solved in the papers by Knowles, Persico and Todd (2001, JPE) and Anwar and Fang (2006, AER).


Ayres and Borowsky (2008) analyzed the details of the Los Angeles Police Department study on field growth (finished with each car suspension or interaction with a citizen) from July 2003 to June 2004. For 10,000 residents, the authors have studied stop variances and differences in search opportunities. get out of a car, or be placed on fixed terms, and racial differences in a series of consequences that include arrest, extortion, and possession of illegal items, arms or medicine. The authors found that regulating regional diversity at the rate of crime, population, unemployment and welfare did not mean preventing the ethnic discrimination at 10,000 population using the monitoring regions as a surveillance device. -10 000 The analysts have found that the most likely convictions, more likely demands and more likely requests for Black people who have been suspended are to exit a vehicle that is less easily taken and less beat than white civilians are to take place. Similar differences regarding white citizens were found in Spanish residents. They also conducted experiments on whether racial profiling was linked to this inequality and found evidence of greater bias in non-White people by non-White officials.

A concept of policing and search was created by Anwar and Fang (2006). Officers are enhancing opportunities after good fights and searching for both drivers where the predicted gains are right. The officers of their model can act independently, in that a police agent can determine the supposed boundaries of the driver race. The police officers can act independently. 

The authors focused in particular on the infra-marginality issue which plagued the racial profiling test results and used their model as a sufficient basis for developing but unnecessary form of evidence of racial discrimination also providing a powerful and powerful test of racial print. 

To put it bluntly, their model means that when officials do not engage in discriminatory behaviour, especially discriminatory behaviour motivated by statistical predictions, the difference between police of different races in standing or searching drivers (depending on driver race) does not depend on driver race.

Or if white officials stopped A satisfaction with this condition may mean that white drivers at a higher pace than the black ones have stopped Black drivers.

In Florida, the authors have utilised this model to evaluate results. They noticed that white officers, led by Spanish authorities and Blacks, searched citizens of all races at a high degree. Similarly, the flexibility in cross-officer driving has demonstrated positions not based upon the driver's competition. The writers, however, observed higher rates of black searches, followed by white Spaniards and then black and Spanish searches. Both teams were searched by white police very high rates, but the difference in the driver's race was as great as in the White police, as was the difference in the level of beatings.

Autonomics and Knight (2009) An analysis of police stance by the Boston police force, depending on the ethnicity of the police officer, relies on discrepancies between the tending to look out drivers from various races. They also built a basic model in which shifts in search costs in race categories represent varying patterns in stopping and looking for drivers from different races. Similar to prior work in the sector, the lower expense of nominating members of the opposition party was to discriminate "by the sake of" (animal-related conduct, in committee terminology). Here the key prediction is that where the official race matches the race of the driver when deciding if the stopper can lead to an investigation, the search costs are anomalies that cannot be changed for the theoretical forecast owing to the real racial drawbacks. The analyses by the writers showed the impact of such interactions, in which Black officials may search for a White car driver compared to White officials, and white officials may search for a Black driver associated with Black officials.

4. Several influential papers, such Goldin and Rouse (2000, AER), have used the difference in-difference estimators to test whether the disparate outcomes experienced by different groups are a result of prejudice by the decision makers. Describe the intuition behind such an estimator. Show by example or by a simple model why such reasoning may be problematic.


The uses of environmental test to assess treatment outcomes in the A general acceptance in economic arts analysis and other social sciences was obtained from the absence of real testing results. A direct comparison of pre-treatment findings with treatment results may be contaminated by temporary treatment practise for those subjected in treatment shifts or by the outcome of treatment incidents that have occurred between the two periods other than treatment. However, when a non-treatment group about half of the population was subjected to treatment, a transient outcome variation which is not related to exposure to treatment may be established. This basic definition is the basis of the variance ratio (DID). Card with Krueger (1994) analyses the results of New Jersey low revenue pay in Pennsylvania, the neighbouring state, to define work variance be made by New Jersey face the lack of higher wage increases. 

Other DID programs including research on the effects of the arrival of traditional and professional leaders (Card, 1990), The consequences of temporary wage gains during employment (Meyer, Viscusi and Durbin, 1995) as well as the impact of anti-money laundering regulations (Garvey and Hanka,1999).


It is well known to be founded on sound logic on a standard DID calculation. In fact, standard DID interventions require that intermediate care and management effects, in the absence of drugs, would be maintained over time by the same procedures. If the element of pre-treatment is assumed to be compatible, the power of outcome variability between therapy and care group could not be calculated.

This study looks at an issue where differences in visual symptoms create inconsistent power Treated as well as untreated groups results. It is shown that the median benefit of therapy can be calculated by a simple two-step approach. In such a situation. Moreover, this article's rating system requires covariates to be used to describe how the results standard treatment differs from changes in visual symptoms. Although there are large transcripts of semi parametric and non-parametric methods, there are few articles dedicated to the study and development of DID diagnostic criteria. Something different by Besley and Case (1994), Meyer (1995), Heckman, Ichimura and Todd (1997), Imbens, Liebman and Eissa Heckman, Ichimura, Smith and Todd, Angrist and Krueger, Blundell and Curdy Blundell, Costa Dias, Meghir and van Reenen (2001) and Athey and Imbens.

Heckman et al. included in his diagnostic technique in the article (1997,1998), the measuring method that varies in three respects from the original texts. Second, the same individuals should not need to be studied frequently. Traditional DID calculation data criteria apply to the proposed specifications when inserting duplicates shortcuts. Second, it allows parameterises parametric measurement in the intermediate effect of controlled treatment treated in selected covariates of interest. 

The system will fully embrace multi-level control versatility (i.e., alternative therapeutic potential). This can be described as a basic structure of DID. The interest of person I during t is due to Y I t). The pre-treatment period (t=0) and pre-treatment period (t=1) indicate the number of individuals. A part of the population has been subject to therapy during these two years. If each person was subjected to the previous treatment cycle t, we define D I t) = 1 if not D I t) = 0. We name D I 1) = 1 people treated and D I 1) = 0 control (or non-treatable). Since people are being subjected for the first time to back counselling, D I 0) is 0 for all. Using a model line parameter to calculate a regular DID. It first helps to process the DID model structure, right ideas and read the non-parameter described in section 3. 

The next DID model design is based on what is given in Ashenfelter and Card (1985). Suppose the flexibility of the effect is caused by the elements of the diversity process

Y (i, t) = ? (t) + ? · D (i, t) + ? (i) + ? (i, t) (1).

Where ? (t) is a specific factor, ? represents the effect of treatment, ? (i) is the proportion of the individual, and ? (i, t) the supernatural shock means zero in each time, t = 0, 1, and may be combined at a time. Only Y (i, t) and D (i, t) are seen. The therapeutic effect, ?, is not identified without further limitation. An adequate diagnostic criterion as choice of treatment does not depend on the individual's past shock, i.e.

P (D (i, 1) = 1 | ? (i, t)) = P (D (i, 1) = 1) (2) of t = 0, 1. Adding and removing E [? (i) | D (i, 1)] in equation (1), we find Y (i, t) = ? (t) + ? · D (i, t) + E [? (i) | D (i, 1)] + ? (i, t), (3) where ?(i, t) = ? (i)- E{? (i) | D (i, 1)} + ? (i, t). Note that ? (t) = ? (0) + (? (1) - ? (0)) t, and E [? (i) | D (i, 1)] = E [? (i) | D (i, 1) = 0] + (E [? (i) | D (i, 1) = 1] - E [? (i) | D (i, 1) = 0)) D (i, 1). Allow µ = E [? (i) | D (i, 1) = 0] + ? (0), ? = E [? (i) | D (i, 1) = 1] - E [? (i) | D (i, 1) = 0] and ? = ? (1) - ? (0). We get it Y (i, t) = µ + ? · D (i, 1) + ? · t + ? · D (i, t) + ? (i, t). (4).

Limit t = 0, 1 means E [(1) D I 1), t, D I t)) · · · I t)] = 0, then at least squares of all parameters are evaluated in equation (4) including the therapeutical impact ?. The model makes it possible to use the single component, D I 1) = 1, for any form of dependency between treatment options ? (i). This model is called "difference-indifference," as we have in equation (2) under the condition of reference, ? = {E [Y (i, 1) | D (i, 1) = 1] - E [Y (i, 1) | D (i, 1) = 0]} - {E [Y (i, 0) | D (i, 1) = 1] - E [Y (i, 0) | D (i, 1) = 0]}, (5).

And the average square measure of ? is the average sample size (5). This problem-solving is useful when repetitive cross-sections of (Y (i, t), D (i, 1)) for t = 0, 1 is available. If the sample has pre- and post-treatment treatment view of the variable variables, Y (i, 1) and Y (i, 0), are available, then rated by minimal reversal of Y (i, 1) - Y (i, 0) in D (i, 1):

? = E [Y (i, 1) - Y (i, 0) | D (i, 1) = 1] - E [Y (i, 1) - Y (i, 0) | D (i, 1) = 0]. Note that equation (2) of t = 0, 1 means that ? (i, 1) - ? (i, 0) means independent.

Consequently, D (i, 1) shows that, in the absence of medication, the intermediate outcomes for those administered would have been close to the median outcome of the untreated patient. According to the model, this limit will be very complicated if the procedure and controls for covariates, which are assumed to be correlated with the complex influence of the effect, are not equivalent. For e.g., it is written that before the training period, participants in training programmes reality the experience of declining wages (Ashenfelter dip, Ashenfelter (1978)). This is a fact that the option of training may be influenced by the trauma that happens independently prior to the pay of the training. Ashenfelter and Khadi (1985) proposed the following selection process model in order to fix this problem:

 D (i, 1) =


1 if Y (i, 1 - ?) + u (i)

0 otherwise, (6).

Y ? is invariant, where ? is a whole number, and I random variables are independent of some partial variety. Below this is the development of a screening process, the training scheme will include those four low-pay/pre-training individuals. This example usually does not refer to the identity condition in equation (2). The explanation is that it is permitted to assemble individual objects, ? (i, t), at a time. However, if equation (6) can describe the selection process, then P (D I 1) = 1 |

Y (i, 1 - ?), v (i, t)) = P (D (i, 1) = 1 | Y (i, 1 - ?)). They DID model contains conditions for Y (i, 1 - ?), so the therapeutic effect is given by

{E [Y (i, 1) | X (i), D (i, 1) = 1] - E [Y (i, 1) | X (i), D (i, 1) = 0]} - {E [Y (i, 0) | X (i), D (i, 1) = 1] - E [Y (i, 0) | X (i), D (i, 1) = 0]} (7).

If X (i) = Y (i, 1 - ?). In general, X(i) is a visual vector characteristic in this article, such as population density, predetermined at t = 0.0. A Conditional The limit of identification is superior to the DID system where there is a vector in X(i) that is assumed to be related to outcome measures that varies between therapies and controls in their delivery. In equation (4), the conventional method of settling covariates in the DID model is to tell them equally:


Y (i, t) = µ + X (i) 0? (t) + ? · D (i, 1) + ? · t + ? · D (i, t) + ? (i, t), (8).

Where X(i) is deemed unrelated to ? (i, t). The form of the DID model makes the use of covariates to reflect variability of side effects, since the coefficients in X I shift with t. We find that we divide the last number in comparison to t,

Y (i, 1) - Y (i, 0) = ? + X (i)

0? + ? · D (i, 1) + (? (i, 1) - ? (i, 0)).

Where there is ? = ? (1) - ? (0). This alternate designation is helpful where repetitive views are available in the study. As Meyer (1995) noted, however, he added covariates of this simple way, if therapy has differing outcomes on persons in different classes, it might be incorrect. It is possible to study variation of treatment outcomes by defining aa in equation (8) as the X(i) function (e.g., by adding the X(i) and D (i, t) relationship in equation (8)). Ideally, covariates should be handled at random, as in equation (7), to prevent possible discrepancies created by mis-specification of the functional type. 

However, if the number of covariates needed for identification is high, in order to obtain interpretive results, some kind of additional integration X(i) is required. The next segment suggests a new versatile process focused on conditional recognition constraints to control the impact of covariates on the DID model. The function of covariates in this new method is doubled, as is common with the MAKE model. Second, we expand the identification by using covariates to all situations where the variation in integration has been recognised and controls result in contradictory power of performance variability. In addition, the influence of treatment has provided for discrepancies between individuals, so it is possible to use covariates to explain the effect of treatment on various types of persons.

Although covariates are seldom treated for recognition, the characters have a paramimonious parametric ranking on the scale of the impact of treatment in a condition treated in selected covariates of concern. A distinctive feature of the approaches proposed in this paper. Heckman et al evaluated the analogous form of obtaining covariates on the DID scale (1997, 1998) proposing a DID rating of a standard treatment outcome in holdings are also based on a conditional restriction of identification. Their rating was made by similar differences in outcomes of pre- and post-treatment treatment for overweight patient’s rate of variance in outcome of pre- and post-treatment treatment of those who were not treated.


5. (Algorithmic Fairness.) Suppose that you have a training data set of loan applications and approval decisions. For each loan application, the data set include information about the applicants’ race (r), and other features (including gender, age, income, credit score, property information), and the information about whether the loan was approved (”the action”), and for approved loans, the data set also contains information about whether the borrower subsequently defaulted in the loan payment (”the outcome”). Suppose that you would like to use the data set to design and train an algorithm that will automate loan approvals. However, you are worried that the loan officers that made the approval decisions contained in the training data set may be prejudiced against minority applicants. Discuss how you may test for the presence of racial prejudice in the training data; and if you do detect racial prejudice in the training data, what will be possible approaches to ensure that the algorithm does not inherit, perpetrate or even exacerbate the biases in the training data. [Note: This question is open ended, and I do not have a correct answer. I will be looking for the quality of your thinking when approaching this problem, not necessarily the answer, when I grade. If you need to change any of the assumptions or add additional assumptions for the analysis, please state so and explain you’re reasoning clearly.]


Its benefits and drawbacks are represented by different types of machines. Since they can be used for any partition algorithm, the first phase approaches can be useful. The understanding of the observations, however, is damaging. Moreover, as they are not synonymous with a step algorithm, the degree of precision found at the end of the method is somewhat unpredictable. Post-process approaches may be used on any stage algorithm, equivalent to pre-process procedures. However, due to the late point of the learning period in which they were used, the following findings are derived from post-operative methods [138]. It can be easier to fully eradicate biases such as multiple effects in the processor; however, this is not necessarily the case with the measure you like, and may be considered biased because it knowingly hurts other people's accuracy to reward others (this is also related to disputes in the legal and economic field of the act of consent, see [58]). Specifically, they will handle two people who are the same in any respect after the process, but in a category that is theirs.

This approach demands that the decision maker inherit the community information at the end of the loop (this information may not be available due to legal or privacy reasons). Internal processes are advantageous because they can precisely identify the exchange needed in objective work between precision and precision [138]. Such techniques still exist, however, and are tightly incorporated with the computer algorithm itself. We then see that the choice of approach depends on the availability of actual land, the detection during testing of critical signals, and the desired concept of righteousness, i.e., it may differ from one app to another as well.

There have been several initial attempts to decide which approaches are best used. The study [64] was the first attempt in literature to compare many alternatives to justice [28, 54, 79, 143]. Binary distinction with characteristics of binary sensitivity is the subject of the study. 

The authors have shown that the efficacy of the strategy’s ranges across data sets, and there is no absolute law. Other studies performed by [116] have shown, as the first benchmark, that methods perform better than pre-process procedures in most cases and, in some cases, do not contribute to the inference that more detailed magic is required.

Recent art research [57] has provided several analytical analyzes methods and compared the trading accuracy of the acquisitions obtained by these methods. Authors evaluated the effectiveness of these approaches at various non-discriminatory measures and beyond different data sets. So they summarized that there was no better way to others in all cases and that the results depend on the scale of inequality, data, and changes in train testing separation. More research is needed to develop approaches to solid inequalities and metrics or, to find an adequate method and metrics for each situation. For example, conclusions achieved when considering lost data may be significantly different from what was achieved there all details are available [74, 99]. [74] Examine the estimates of the measure of inequality when protected group membership is not available for data. [99] Evaluated statistical inclusion strategies addressing the validity of insufficient examples in the database. 

They have shown that lines containing missing values may be more reliable than any other value, indicating installation rather than deletion of this material. [110] showed that if there is an apparent data skew, indicating that the non-eligible classes are very little represented, the techniques of the pre-processing phase will circumvent internal processes.


We study the most commonly used data sets in algorithmic accuracy books in this section. ProPublica database for risk management The ProPublica database incorporates data from the risk assessment framework COMPAS (see [1, 6, and 88]). The database has historically been commonly used for judicial research in the area of risk to justice [15]. The database contains 6,167 persons, and the number of former inmates, charging credentials, age, race and gender are aspects of the database. The targeted variant shows if, within two years of being released from jail, the inmate was rehabilitated (re-arrested). This database has historically been used in two versions in terms of critical dynamics - the first where race is considered a critical attribute and the second where gender is considered a critical quality [13, 30, 52, 57, 99].

Adult income database

According to the 1994 US census results, the adult database is open to the public in the UCI asylum [43]. The purpose of this database is to accurately predict whether there is $ 50,000 a year based on variables such as jobs, marital status, and education that someone will receive more or less. In this database, the essential factors include age [94], gender [144] and race [57, 99, 143]. 

For a number of pre-processing operations, this database is used. For e.g., after training, a database for [143] included 45,222 individuals (48,842 before processing).

German credit database

The German database is publicly accessible through the UCI database [43] which, in 1994, provides records of individuals from the German bank. The aim of this database is to predict whether good or bad credit risk points should be earned by an entity based on factors such as jobs, accommodation, savings, and age. In this database, essential attributes include gender [57, 94] and age [75, 144]. This database, with just 1,000 Indians, is very small.

Default loan database

30,000 cases and 24 credit card customers are listed in the default loan database. The icon in the UCI shelter is freely accessible [43, 141]. The aim is to predict what automated payment the consumer will make. Age, ethnicity, marital status, past payments, credit limits and qualifications are considerations. For e.g., [13] and [141] used this index, when gender was studied as sensitive.

 Fair Sequential Learning

Most of the algorithmic justice analysis available looks at batch isolation, where full data is available prematurely. However, several systems involve an online investigation of learning and verification, in which data is accumulated over time. In online learning, the system adds response logs, as opposed to learning the batch, so that the decision in each phase is affected by state and future decisions. This raises difficulties for all to identify and implement effective algorithmic decisions, as fairness must now be taken into consideration in each step, and long-term consequences can be influenced by short-term actions. In these situations, the use of current knowledge (such as the recruiting of already identified populations) and novel solutions must be matched by the processing of vast volumes of data (e.g., hiring people from different backgrounds different from current employees).

In successive studies [66, 72, 73, 80, 133], various studies studied justice. For example,[72] to research justice as Markov's decision process in improving learning and imitating nature. In their paradigm, fairness is described in such a way that if its long-term salary is decreased, one action will never be more selective than another. [66] Describing justice as the dignity of period-dependent entities often calls for stable algorithm decisions over time. They propose a dispatch approach that sets out these time-dependent problems at the same time for the arrival of two incoming entities, and the same labels should be given to them at the same size of their function.

In this domain, the open problems include the limit of any time-dependent equity definitions of the chosen duration and the influence of different discounted functions. In addition, you should be mindful that the research approach may be ethically segregated and force a new form of inequality to occur.

In the same line of work, the researchers analysed situations in which the potential to induce bias amplification was present in response logs. In these cases, the learning models of machine-based decisions and then impact subsequent data gathered. The drawback of reacting to loops is that they will submit forecasts of self-fulfilment, where anticipating changes will alter outcomes. For example, deploying other police officers to an area that has been classified as at high risk of crime would inevitably result in more arrests in this area, and then a predictable model will gradually raise the estimates of environmental risk [53].

Note that the correct sequential reading differs from other researched domains in algorithmic justice that affects the selection process that consists of multiple categories, e.g., Candidates' examinations start with their fresh start, then their test scores and finally there are interviews, where more information about individuals in each section is available. 

This field sometimes referred to as proper pipes [21, 45, 52, 69, and 97]. In these studies, justice is reviewed for consideration in each section, not just the last paragraph.

Good Learning about Enemies

Today, the use of opposition networks (GANs) [61] is very common in opposition reading. Centered on a training range, GANs are widely used for the sampling of representative delegates. Input data can be from different contexts, such as photographs or tabular data, in this area of analysis. For example, the machine view (CV) uses counter-reading for tasks such as creating images (as in [9]) or changing them (similar to [7]), as well as other CV functions. The reading of the right opposite these days is gaining growing attention both to right discrimination and to equal presentations. In another horrific incident, when the app's "photo filter" was supposed to alter the face pictures of lightening the skin with an "attractive" attractiveness, the face modifications the app was described as discriminatory [111]. 

GANs are typically constructed from generator G as a loop model, which produces samples that are "incorrect" and "D" (enemy") symbols that determine whether samples produced are real or false and return resolutions as a response to generator G to enhance its model." Improving G implies increasing its ability to generate it in a manner that "deceives" the discriminator D, gradually being more like real samples, thus reducing its ability to differentiate between actual and false samples. Both G and D typically have neural networks with many layers.

In order to use GANs in correct learning, previous studies have developed a variety of methods. These models are often built as minima user problems aimed at maximizing ability to predict accurately predict results while minimizing enemy power predicting a critical aspect.

Alternatively, it was suggested that the answer structure be used to determine whether he was qualified the distinction is correct or not and accordingly evaluate the model [32, 137, 145]. A different strategy promotes the use of GANs to further read accurate presentations or incorporate training data and make it more difficult to discriminate between the samples belonging to the fortunate group and the empty group after subdivision [17, 48, 96].

Another approach [3, 139] uses GANs to produce from initial input data specific synthetic data and use it to train some partitions. [139] For example, the generator and two detectors use the GAN system separately. One discriminator is qualified to differentiate between true or false (like regular GANs) what is generated and what is not the sample, and the second implies that the sample belongs to the right or wrong party.

Some of these methods make efforts to store semantic data in a timely manner read the correct presentations [114, 124]. This is important from the descriptive and a visual aspect how justice is done in algorithm decisions is important in developing decision-making and trust in algorithms, and it is a great challenge for future research. you have to face it.

Some papers read the correct counter-reading. [17] investigate the effect of input Unfair sample selection from competent study models that contradicts and shows little the measured data can be used to achieve correct presentations. [20 In graph embedding, learning to maximise justice. [16] raised some questions, which should be investigated, about opposing reading. They argue that these organisms are often fragile and can thus face such hazards when used in the processing context.

Note that in the field of game theory, some of the most closely connected problems are meant to gain marginal points, so game-theoretical methods can also be used for solutions [4, 5, 32, 55]. We can also see that equitable reading is predictable from the literature of the opposite reading. The outcome of an empty category can be seen as learning to anticipate a certain domain [48, 96], so it is possible to accept remarks from the field of domain planning to research the field of algorithmic justice for progress, and vice versa.

Appropriate Reading: The viewing data collected in real-world programs can provide much more coherence and integration, rather than understanding the underlying structure. In contrast, causal learning is based on more Information organized as an example of causes and effects.

The causal mechanisms can help to perpetuate injustice through a number of practices. For example, by understanding the causes and effects of data, a model can help address the Challenging explanations of inequality by examining what kinds of prejudice should be tolerated and which should not be allowed [87, 118]. Using critical reasoning, another approach to foster fairness is to have insight into how to measure missing profit or how to edit a document containing a sample or collection options [10, 127].

In addition, understanding the underlying model will aid in other ethical challenges, such as understanding the origins of prejudice, identifying debt and obligation. This will improve visibility and the description of compatible models, which are critical for reliability as well. [87] The presumption of justice called counterfactual right has been boosted. Score the degree to which two similar predictions Y can be built - one trained by the correct group of holders and the second trained by the empty group - using some mixture of variables in a method that can be assigned to vital duty. The assumption is that if the critical characteristic was changed, the forecast would not shift with a correct model (and its variability affected). Specifically, since the expected mark is not contingent on the generation of essential attributes, the causal graph satisfies counterfactual inequality.

Numerous studies have suggested different views of the injustices of the debate, which are compelling a strict limit on any interest. For e.g., if the expected mark does not rely on any representative of the sensitive matter attribute, the graph does not suffer from representative discrimination [84] (representative feature is a feature that can be used to find a critical aspect). Furthermore, if the expected mark is not based on any discrimination, the graph would not answer discrimination. resolution fluctuations (resolution fluctuations are influenced by a critical factor but accepted by acting as non-discrimination). [93] propose to classify the causal mechanisms of righteousness into three categories: individual vs. group level [84] causal effects; clear compared to specified [105] statistical structure; and creation accurate predictions compared to defining and measuring discrimination [146]. For example, [93] edit individual justice disputes, transparency and the use of predictive functions.

 Extensive reviews at the cause of the cause see [93]. It is important to recognise that causal honesty models can really allow us to address many of the difficulties faced in terms of appropriate forecasting operations; however, it is challenging to find the appropriate causal model in practise. In addition, all causal findings obtained by causal are removed the model may compromise the accuracy.




Question 3. Positive Association Test of Adverse Selection (10 points) 

1. What is the positive association test for asymmetric information? What are the key assumptions under which the positive association test is valid?


Asymmetric data, also referred to as "information failure," happens when one side has more information than the other party in an economic transaction. This is also seen where the supplier of a good product or service has more experience than the customer; variable versatility is often possible, though. 

Almost all economic transactions include data asymmetries. Asymmetric data is widely known as preventing effective insurance performance markets, but whether they exist in certain markets remains a matter of practical research. In recent years, many studies have tested asymmetric data on various insurance markets. The work was largely based on the “good/positive relationship” test.

This test discards the misconception of the corresponding data if there is a positive correlation between them the purchase of insurance and the occurrence of a risk, with the condition of the consumer signs used to set insurance prices. The limit of good pr positive meeting testing, will be compromised when people have confidential information about other features there is a type of risk, such as risk preferences, and where these other factors affect the demand for insurance. A number of courses.

Older models of equality and unpopular choices or risk behaviours have speculated those that purchase more policies are more likely to be prone to insurance risk (Cawley no Philipson 1999, Chiappori and Salanie 2000). Insurance policy decreases the cost of a predetermined outcome for moral liability and thereby increases the anticipated loss. For the unpopular option, the licenced ones know more about the type of pre-accident than the insurance provider, and they know more about the type of pre-accident at a given price in need of insurance. This understanding is based on a very common trial of unequal data in the insurance market: a good combination test. This measure estimates the link with the insurance amounts per person bought with his previous risk history, there are conditions for noticeable signs included in price insurance plans. Setting the criteria for all the details used to set insurance premiums is important.

For example, the observation that smokers prefer more life insurance than non-smokers and that they still have a high risk of death does not provide proof of unfair data once insurance contracts are concluded at a different price for smokers and non-smokers. Results from a good combination of and Unused visual inspections are always conditional on the insurance company's risk classification assign to individuals. 


2. What are the methods to implement the positive association test?


The test of canonical positive integration includes estimates of reduced economic models: Insurance allowance (C) for one and chance of loss for the other (C) (L). We present compatible versions of both types for convenience. In both estimates, descriptive variance (X) is a set of insurance variables used by the company to position the customer at the level of risk. 

The rating figures are:

(1a) Ci = Xi * ? + ?i

(1b) Li = Xi * ? + ?i.

The ?i and ?i must coincide under the null hypothesis of equal knowledge. The extraordinary positive association between the two contradicts the null hypothesis statistically and leads to asymmetry.

Hypothesis is characterised as "a statement that can be questioned or tested, and that can be disputed in scientific studies." 2 There is another hypothesis in accordance with the null hypothesis (H0 - initial assumptions of discrepancies or assumptions agreed as true given status) (HA - an additional description of the same situation, which could replace H0 and needs to be tested). For instance, H0 reports that both oral isotretinoin (ISO) and topical retinoic acid 0.05 percent (RA- 0.05 percent) have comparable effects on multiple imaging-related findings in a randomised clinical trial (RCT). The HA tested in the above analysis, on the other hand, believed that the isotretinoin effect in the picture was greater than the topical RA effect.

Typically, when dealing on a hypothesis test, what the researcher wants to determine is whether a certain outcome (e.g., injury incidence, levels of blood stains, etc.) varies when contrasting the intervention group and the control group (in study studies) or when comparing unidentified subjects (in observational studies).

When faced with a decision to reject H0, the acceptable likelihood of type I or "alpha" error (probability of rejecting H0 based on sample outcomes, where H0 is actually valid for the target population) must first be identified as acceptable by researchers. Usually, two-tailed measurements of form error are set at 5 percent (and 2.5 percent for single-tailed tests). This potential is named "p-value" in science articles and is used to determine whether or not the outcome is "mathematically important".

In Finkelstein and Pot) (2004), we have used a good integration test in the UK pension market, using data from a different insurance company during 1981-1998. We rejected this null for equal information. Using a virtual reality test that is not used in the same market has several applications objectives unused visual test is a very powerful test for unequal details than a good integration test. Second, an unused visual test can provide some understanding of sources of confidential information about the risk of death.


3. If you do not find evidence in support of positive association in a particular market under your study, what will be your conclusion regarding the presence of asymmetric information in the market? Answer the last question using the following two papers as examples: 

(a) Finkelstein & McGarry (2006)’s study on the long-term care insurance market; 

(b) Fang, Keane and Silverman (2008)’s study on the Medigap insurance market.


A positive correction test revealed a variety of findings in the various insurance markets Finkelstein and McGarry (2006) find a negative link between the availability of insurance and the risk of long-term care insurance, and Fang, Keane and Silverman (2008) present similar findings of Medigap insurance. A different finding is that the claim for insurance is determined not only by personal information about the nature of the accident but also with heterogeneity in risk tolerance. All other equals, which can be very dangerous are possible demand more pensions and more life insurance. Wealthy people may like one of these kinds of insurance. Risk and wealth aversion, though, can be negatively associated with the likelihood of premature death, and it goes along with the chance of survival, since the greater the risk is the risk, since wealthier individuals can spend more in things that benefit health. Evidence supporting this concept is given by Cutler, Finkelstein and McGarry (2008). If the example above indicates, individuals have varying insurance expectations. It is no longer possible to quantify the relationship between ?i and ?i in equations (1a) and (1b) only for the non-detection discrepancy in probability of failure. When individuals have sensitive information about their risk class (Z1) and they have various degrees of risk avoidance (Z2), residues of (1a) and (1b) can be registered.

(2a) =i = Z1, i * ?1 + Z2, i * ?2 + ?i and

(2b) ?i = Z1, i * ?1 + Z2, i * ?2 + ?i.

The notion of positive corrective testing suggests that the type of exposure for sensitive details (Z1) is definitely included in both insurance policy and failure risk (?1>0 and ?1>0). If the accident tolerance (Z2) suits well with the cover as well, but does not match well with the probability of failure (?2>0 and ?2<0>

Silverman's (2008) analysis of the Medigap market and the study of the long-term care insurance market by Finkelstein and McGarry (2006) indicate that hidden insurance expectations are closely linked to the form of invisible threat.


4. What is the idea in Einav, Finkelstein and Cullen (2010, QJE) to test for adverse selection vs. advantageous selection? What is the theoretical problem with their test in light of Fang and Wu (2016) paper? What may be the problems in the empirical implementation of their test?


Einav and Finkelstein (2011) clearly show the nature of equality with evil as well profitable options, showing how profitable options create more insurance relative to good distribution, unlike the old insurance made with bad choices. Numerous art research suggests the importance of selective diversity in insurance markets t, Cohen and Einav's (2007) automotive study insurance and Einav, Finkelstein and Schrimpf's (2010) U.K. market analysis. Unseen contractual preferences fit well with the risk-related needs of choice, therefore to strengthen the positive link between the availability of insurance and the risk that occurs in private details on the nature of the accident.

We start by looking at the claim for insurance claims and costs, starting with the case of insurance claims and costs, in fully competitive, impartial, fairly competitive, impartial offering one contract rms providing one insurance contract covering any possible losses; people who hate accidents differ only in their outfit including some potential loss; people who do not want danger are different from them (privately known) chances of recovering that loss; and there are no other known private opportunities) to recover such losses; and there are no other disputes over the provision of insurance, such as the costs of administering or processing claims. ions in providing insurance, such as the cost of administering or processing claims. Therefore, more in the spirit of Akerlof (1970) and in contrast to the more well-known natural world, especially in the spirit of Akerlof (1970) and in contrast to the known existence of Rothschild and Stiglitz (1976), fif Rothschild and Stiglitz (1976), businesses that compete in numbers but do not compete in numbers that do not compete in aspects of securing an insurance policy. We are going straight to these fundamentals and facets of the collection of an insurance policy. To make it easier to ponder over time in this post, we are returning to this crucial topic.

Figure 1 gives a good description of the situation and illustrates the way that leads to poor choices and their effects on the use of insurance and bad choices and their effects on the use of insurance and welfare. The statistic looks at a single sector; figure c. Contract insurance for customers. Consumers make binary options in this market, whether or not you purchase this contract, and you make binary options in this market to buy this contract or not, and businesses in this market only compete in terms of how much the contract will be paid. Only in terms of how much the deal will be paid will the rms in this market contend.

The vertical axis shows the contract price (and expected cost) and the vertical axis shows the contract price (and expected cost) and the horizontal axis shows the amount of insurance required. The horizontal axis, as in mammals, shows the magnitude of the need for insurance. Binary choices are faced by people whether or not to purchase a contract, "quantity" ace binary choice whether or not to buy a contract, "quantity" protection is a fraction of the insured. With impartial insurance agencies with no additional differences, social (and motorists and no additional conflicts, social expenses (and companies) associated with offering insurance are planned insurance claims - that is, anticipated travel insurance claims are predicted - that is, anticipated premium payments. Payouts on tactics. The consumer appetite for an insurance contract as seen in figure 1.

Because the curve of consumer demand for insurance policy is clearly seen in Figure 1 and individuals in this context can only choose a contract or not, the market conditions specified in this setting can only choose an arrangement or not, the market condition curve simply allows the distribution of a collection of people willing to pay involve the distribution of a collection of people willing to pay by Although this is a common model for a unit that can run or contract and this is a standard model search unit that can operate in many conventional product markets, the context of book insurance enables us to connect to all traditional product markets; the context of book insurance allows us to link the ability to cover expenses. In fact, the ability of a person to avoid risk is to pay for the disease in order to offset the expenses. The desire of a person to pay for risk insurance is, in particular, the amount of the estimated risks and the person's risk premium.



Question4. Elasticity of Demand for Medical Care (10 points)

 In the famous Rand Health Insurance Experiment (Rand HIE), families are randomly assigned to health insurance plans with coinsurance rates at levels of 0,25, 50, or 95 percent respectively, moreover each plan had an upper limit (the maximum dollar expenditure (MDE), or stop-loss) on annual out-of-pocket expenses of 5, 10, or 15 percent of family income, up to a maximum of $1000. Beyond the MDE, the insurance plan reimbursed all covered expenses in full. Analysis based on the data from the Rand HIE found that price elasticity for medical care demand is approximately ? 0.2. Describe the essence of the empirical analysis underlying the ? 0.2elasticity estimate. 

1. What do you think is the key problem of the experimental design?



The RAND test delivered health care to about 5,800 persons in six places around the US from around 2,000 households, a study intended to represent families of adults under the age of 62. The report provided a variety of cost-sharing services for households with health benefits, ranging from full coverage ('free care') to programmes that provided virtually no accessibility per annum of $4,000. In the making and study of randomised evaluations and economic analysis of the risk of action in the sense of health care, RAND scholars were leaders in what was then the realm of social science novels at the time.

More than three decades later, the findings of RAND are now commonly known as the "gold standard" of evidence to forecast the future effect of the transition of health insurance on medical expenditure, as well as to devise actual insurance plans. These balances have far-reaching consequences, considering the exponential increase of health spending and the strains imposed on public sector budgets, as state and federal policy makers explore possible policy measures to minimise public spending on health care. We are not likely to see anything like the RAND test for financial reasons alone: the overall cost of research sponsored by the US Department of Agriculture, Education, and Social Care (now the Department of Health and Human Services) was about $295 million dollars in 2011. We have three key targets. First, in almost the same manner as it will be discussed today, we are re-introducing the main conclusions of the RAND test to make the main test results more available to existing readers. Second, we have tested the quality of the effects of the test treatment. 

Potential issues with different trial engagement and different reporting results for all diagnostic treatments can be discussed across all real-world evaluations: for instance, if those expecting a condition are more likely to enrol in a study where insurance has better compensation, there could have a small effect on generosity. Finally, we rethink the common RAND calculation that medical spending resilience is -0.2 in comparison to its pocket price. We differ between how this stretch was first considered and how it was used later, and we normally caution against seeking to outline test care effects using a single consolidation price from offline health care contracts.

Throughout the discussion, we reflect on one of the two enduring principles of RAND - its balancing of the effects on medical spending of multiple health insurance policies - and we do not explore its impact on the health outcomes of major insurance coverage. We have done this in part because publicly accessible health data is unreliable (thus it does not encourage existing RAND findings to be duplicated), and in part because the original health impact projections were already more reliable than those used for health use, and additional complexity could be added by lower criteria to determine possible risks.

The primary thing you want as seen in figure 1. In a horizontal dimension, health insurance spending is summarised with the overall dollar spent on health care programmes (whether insured or out of pocket). The amount of insurance coverage is defined on a straight axis by how this cumulative amount corresponds to pocket money. This figure shows two different budget sets from two different insurance speculation contracts: a solid line represents an individual budget if they have an insurance contract where a person pays 20 cents for every dollar spent on health care spending - a 20 percent guaranteed plan - while the deducted line represents a budget set aside under a generous insurance system where only 10 people pay for health care spending.


In the RAND test, a package with a single six-point consumer income (i.e., a percentage of medical costs charged by the registrant) was allocated to households and consolidated into a three- to five-year plan. A limit of 95, 50, 25, or 0 percent of various forms of policies (the latter being known as "free care") is clearly provided by four out of six policies. For other programmes, the fifth programme had a "mixed value" currency of 25% but 50% for dental and medical services, and the sixth programme had a 95% compensation limit for patient services, but zero percent for patient services (according to RAND Investigators, say the latter is called the "individual withdrawal plan"). The share of the most popular free insurance service (32% of households), followed by a deduction programme (22%), 95% of payments on average (19%), and 25% (11%) on average. Families were also randomly allocated to higher out-of-pocket amounts, called 'Maximum Dollar Expenditure,' under both of these six services, to avoid disclosure to financial applicants. The applicable maximum dollar caps were 5, 10, or 15 percent of family income, up to $750 or $1,000 (approximately $3,000 or $4,000 in 2011 dollars). On average, it was beaten over the year by around one third of the persons who invested less than the amount spent on the Full Dollar, but this may have been more likely for services with high coinsurance amounts.

Programs with basic random deals are not supplied to households. Instead, RAND researchers selected their sample within the site and month of enrolment and distributed it to families using programmes using a "limited selection model" to increase sample variability in basic covariates while meeting the test budget limit; and b) use a randomly assigned allotment to achieve a better balance than would otherwise be possible in a set of basic indicators (given a budget limit).

The information comes from several sources. The survey questionnaire gathered basic demographic and other health records, insurance coverage, and previous utilisation of health care for all subscribers prior to preparing the delivery. During the three to five-year trial duration, participants signed the RAND test in addition to all premiums from their prior insurance policies (if any) and filed claims against this trial as if they were insured; participants had to file claims with the inspectors in order to reimburse the costs accrued. This argument, which includes detailed statistics on insurance expenses accrued during the litigation, produces data on expenditure on health services and outcomes of use. All this knowledge and extensive information available online has been greatly used by RAND researchers, helping us to (almost) reliably replicate their findings.

We follow RAND investigators and use them as the first research team every year. We identify a person by I the order in which p is assigned to the family of that person, t is the calendar year, and l and m are the position and starting month, respectively.

Basic set back takes yi, t = ?p + ?t + ?l, m + ?it.

Where the effect is, t (e.g., treatment costs) is used as a dependent variable, and the expected yearly, local and regional results are the descriptive variables. The six expected outputs of the method, ?p, are the main coefficients of importance. As there was an additional randomization of the Maximum Expenditure thresholds, as stated previously, the approximate coefficients reflected the average outcome of each programme, which measured more than the different limits allocated to families within the system. Because the allocation of the plan was a random condition of the first place and location (e.g. registration), we include a complete set of locations for the first month meeting, ?l, m. We also include consistent annual results, account, and accountability for any time period available for medical care costs. Because the plans are assigned to the family, not to the individual, all the consequences of retreating include common family mistakes.

Now specify Di calendar year deadline for individual testing. We introduce dummy variables to determine the end-of-year expenditure result, too additional controls, in the following equation:

yit = ?p + ? × 1 (t = Di) + +t + ?lm + Xit? + ?it (2)

when parameter captures conditional medium expenditure in the deadline years compared to unlimited years, we call the estimated parameter - the fixed effect. We also introduced human controls. These include age, gender, and income assessment. Age in particular can affect spending power, such as health care needs grow beyond the life cycle; we include a set of gender-related communication outcomes to control life cycle habits. Revenue is provided as a measure log of family income two years before the start of the study, always 2011 USD. 

We also include dummy variations for the registration term. 10 Our preferred specification allows the end result to be different in order. Think about the following model includes a set of term-deadline communication terms:

yit = ?p + ?p × 1 (t = Di) + +t + ?lm + Xit? + ?it (3).

When stating the effect of individual expenditure in the calendar year t. Collection of fixed results ?p provides moderate conditional spending per program p in unlimited years, and gives an extra effect of program p in the last year. We cover all the norms errors at the family level (treatment).

RAND HIE was criticized in many ways:

Some authors are sceptical of the comparative feasibility of HMO and FFS care because the details of those who had been based on the "single, small but well-managed" HMO in Seattle.

One 2007 article suggested that "a large number of participants voluntarily left the research arm" could still squander RAND HIE's findings. In response, colleagues described the argument as "absurd".

RAND HIE not studies people without health insurance so they failed to find out how the presence and absence of health insurance affects.

2. What is the evidence for the problem you identified?


The evidence of money has been spent in the last year of the RAND HIE, which we call the deadline. We find that participants are randomly assigned. The coinsurance plans at low prices how big spikes in use in the last year. We call this the result of a program-deadline interaction. Since the time of last year is given randomly at the beginning of the program - it is randomly determined the provision of three- or five-year registration terms - we translate the deadline speaker as excessively determined by approaching a fixed time. We estimate two sets of program outcomes: those in the final years and those in the previous years. We find that inflation demand is huge in size fixed term. As a result, control over the corresponding timing of the price leads to estimates of lower elasticity in size than a limited model without the effects of price deadline line merging.

We say last year randomly assigned should be incorporated if the purpose is to measure the long-term consistency associated with the permanent public service policy. The general use of category is quantitative care, as well as each amount sample, final year sample, and full sample excluding final years. Since the price is given randomly this should be interpreted as the opposite look for curves. The sloping slope shows extremely strong stiffness. Be careful the first is that the desired curves tend to behave well - that is, downward down decline - at all stages except in patient and mental health care. These are the ones two identical categories that do not show the final result. Second, note the source Classes tend to have higher inflation in the last year. This means that flexibility in non-deadline years is limited by full terms. The registration period of three or five years is randomly assigned to start of testing. We therefore interpret the difference in the ability to spend the entire test period as a result of this random activity.

That is, the spike in last year's use is caused by what is allocated from time to time deadline. Arrow (1975) indicates that such a pattern may be due to in temporal substitution in health care use; that is, health consumption is a long-term process good.


In Appendix C we show that a similar pattern of quality comes from the model at the expense of resilience in the use of health care, with or without long-term positive outcomes. Regardless of the basic model, we say spike is a waste of money given at random deadline, which means that without a deadline there will be no spike. So in the long run the spending between any given price group is closer sample that does not include deadlines. Because the end result works with price, the combined sample produces a price for solidity larger than the average of sample except last year. Sample beyond the deadline yields the best long-term price estimates.

Question6. Adverse Selection and Reclassification Risk Insurance (20 points)

 In this class, we discussed several papers that touch upon the issue of adverse selection, reclassification risks and reclassification risk insurance. 

1. The government observes that health insurance companies charge much higher premiums to those with a gene that predisposes them to cancer. Politicians who view this as unfair propose a bill that would outlaw this form of discrimination. Discuss the consequences of such a proposal for the insurance market and social welfare. 


Insurance is a practise used by households and enterprises to avoid making a negative financial effect on any particular case. Homeowners or insurance providers usually pay monthly, called premiums. Based on the probability of such accidents occurring in the pool of individuals, the insurance provider charges certain premiums. Payments from this money are collected from team members who face particular obstacles.

Many people have a variety of forms of insurance policies: health insurance that protects when they receive medical treatment; auto insurance that pays if the driver is in a car accident; residence or insurance that costs in the event of the death of the principal if the property is demolished and life insurance that takes care of the family. Table 1 displays the number of the insurance markets.

Type of Insurance

Who Does It Pay?

When You Pay. . .


Employers and single

Medical expenses are incurred


Employers and single

policyholders die



Car Insurance is damaged, stolen, or causes injuries to others

Property and Home


damaged or broken

Credit insurance

firms and individuals

Injuries occur that happen to you in part

Malpractice Insurance

Doctors, Lawyers, and Other Professionals

Provide quality and gives to the detriment of others


Both policies cover missing knowledge, both directly and indirectly. Future events cannot be forecast with accuracy at the apparent stage. For example, it's hard to tell for sure who's going to get in a car crash, get ill, die, or have their home robbed the next year. Incomplete data were often used to calculate the probability that this could happen to someone. It is impossible for an insurance provider to quantify the probability that, in other words, a 20-year-old New York City male driver will be at risk, and even inside the category, certain drivers will be better than others. As a consequence, adverse events occur from a mixture of individual characteristics and desires that cause incidents to rise or decline and then the good or poor luck of what eventually occurs.


A simplistic example of auto insurance will function in this manner. Suppose that a group of 100 drivers can be divided into three classes. In a given year, 60 of those people had a few circles on their doorway or carved colour, costing $100 each. Another 30 drivers had minor injuries costing an estimated $1,000, while 10 drivers had significant accidents costing $15,000 in costs. In the meantime, let's say that at the beginning of the year, there is no way to distinguish low-risk, medium-risk, or high-risk drivers. Harm to this category of 100 drivers caused by car crashes would be $186,000, namely:

Total damage (60×$100) + (30×$1,000) + (10×$15,000)



If 100 drivers give a fee of $ 1,860 every single year, the insurance company will collect the $ 186,000 required to cover the cost of the accident.

As insurance firms have such a vast number of clients, they are in a position to bargain with health care suppliers and other services at cheaper rates than they would otherwise be able to afford, thus the consumer income to own premiums and saving the insurance company itself while making claimants.

Insurance firms earn revenue from insurance premiums and dividend income. Investment revenue is generated from investing in insurance firms that have earned in the past but have not paid as insurance premiums in recent years. The insurance firm shall obtain the balance of the return on the investment or on the loan. Investments are typically made in a safe, liquid manner (which is easy to transform to cash), since insurance providers must have easy access to these assets in the case of a major catastrophe.


There are several insurance schemes administered by the federal and state governments. Some of these plans are comparable to health insurance, in the sense that members of the community make strong contributions to the fund and others in the group who suffer poor experience earn payments. Some services defend against threats, however until a transparent fund is created. The following are some examples.

Unemployment Insurance: Workers in all jurisdictions spend less compensation for unemployment insurance, which is part of a fund used to pay employees for a period of time, usually six months after they leave their jobs.

Pension insurance: Workers paying payments to their retiring employees are allowed by statute to contribute a certain portion of their pension funds to the Pension Benefit Fund Corporation, which is used to pay at least half of the pension benefits to employees if the company goes bankrupt and is unable to pay the pension. 

Deposit insurance: Banks are theoretically obligated to contribute a small percentage of their deposits to the Federal Deposit Insurance Agency, which goes to a fund used to pay depositors the amount of their bank deposits up to $250,000 (value rose from $100,000 to $250,000 in 2008) if the bank fails.

Workers' compensation insurance: Employers are constitutionally obligated to pay a certain portion of their wages, and are regulated at the state level, which are used to pay compensation to workers who have sustained work injuries.

Retirement Insurance: Both employers contribute a share of their wages to Social Security and Medicare, which offer income and health insurance to the elderly. Protection and Medicare are not quite the same as welfare, or we claim that people who donate to the scheme are not entitled to coverage. They act as insurance, though, in the way that standard contributions are made to policies currently to decide the benefits that will accrue in the future-either ageing or old age disease. These forms of services are called "social insurance".

Extraordinary charges for insurance providers, besides claims, corporate expenses: administrative costs for hiring workers, account administration and policy claims handling. For most insurance providers, insurance premiums come in and outgoing claims are much more than revenue from investment or management charges. Therefore, although factors such as investment income from savings, administrative costs, and various risk groups make up the whole picture, the basic insurance policy must hold true: Normal insurance payments over time should cover 1) ordinary claims, 2) operating costs of the company, and 3) leave the company's profit area. This legislation could be based on the premise that medium-term premiums and daily insurance premiums should be the same.


2. Affordable Care Act (ACA) prohibits insurance companies from pricing on preexisting conditions. To avoid the unraveling due to adverse selection, the ACA mandates that all individuals obtain health insurance or face a fine. An idea to remove the individual mandate, yet still keep the pre-existing condition is to introduce a so-called “ continuous coverage requirement”, namely, only individuals who have demonstrated that they have previously maintained continuous health insurance coverage can be guaranteed that insurance companies will not price their health insurance application based on pre-existing conditions. Write down a two-period competitive insurance model to examine the pros and cons of the “continuous coverage requirement”, vs individual mandate, in order to address the adverse selection problem.


Alternatives to the Affordable Care Act (ACA) will mandate that Americans be compensated indefinitely or penalised by increased costs. The Republican bill passed by the US under the American Health Care Act (AHCA) House of Representatives – if you repurchase policies for more than 63 days, individuals whose health coverage has lapsed will have a 30 per cent premium fee each month for 12 months. The aim of this penalty was to allow people to keep the insurance sector protected and to ensure consistency. Health providers rely on the insurance benefits raised by reasonably well individuals to offset the increased health expenses of the sicker. Insurance may become incredibly expensive without a large number of stable enrollees. There is also the risk that economies will plunge into a 'death trap,' where premiums escalate exponentially as healthier consumers exit high-cost programmes. 

ACA forbids insurers from denying or charging individuals with pre-existing conditions with insurance care. The ACA provides fiscal credits in order to balance insurance markets to help individuals afford insurance costs and allows everyone to buy insurance policies or otherwise face a tax penalty. The aim of the individual mandate was to put relatively healthier individuals into the insurance system in tandem with tax credits, to pay for the flood of medical staff who already have the right to buy policies. While the promise of compensation for current conditions became one of the most common provisions of the ACA, the individual mandate was more divisive. The AHCA would cover most citizens with pre-existing conditions but would oppose the individual mandate. Instead, the bill provides an agreement to include insurance protection for people on an ongoing basis.

Like the individual mandate, a continuing coverage provision would keep patients from waiting for benefits to get sick. The explanation is that people lapsing in coverage fear being refused coverage in the future. This is a prerequisite. Insurers can charge higher premiums, refrain from covering individual health conditions, or refuse coverage in full when reinserting the market.

The current individual mandate and other rules for federal health care contain grace periods that excuse brief delays. A similar provision in the grace period could help to mitigate irreversible coverage reductions which others would deem unjust. Finally, a persistent requirement in terms of the coverage depends on the willingness of a buyer to measure today's purchase insurance prices against the unpredictable benefits of potential affordability. The usefulness of a continuous coverage provision could be compromised by differences in customer awareness.

3. What is reclassification risk? Provide examples of reclassification risks in the context of health insurance market and life insurance market.


A significant characteristic of the health care market is that the general insurance coverage covers for a year, although the condition will continue for a period of time. This poses a classification problem-the chance of a substantial rise in health insurance when a person's health is declining.

Not all insurance purchasers face the same risks. Any people may get sick from those diseases because of genetics or personal behaviours. Any people may live in places where carjacking or theft is more common than others. Some of the drivers are much safer than most. A risk group can be characterised as a group that shares about the same risk of a bad incident happening.

Insurance providers also separate individuals into high-risk categories and pay cheaper premiums on those at lower risk. If individuals are not classified into risk categories, those at low risk should pay for those at high risk. In a basic example of how auto insurance operates, if 60 drivers had a minimum damage of $100 each, 30 drivers had minor injuries costing $1,000 per person, and 10 drivers had significant accidents. Cost is $15,000. If all these 100 drivers pay the same $1,860, those with fewer harm will actually pay for those with more damage.

If it is possible to distinguish drivers according to risk categories, each category will be paid according to the estimated loss. For example, an insurance provider will bill 60 drivers who tend to be the safest for every $100 each, which is a limited amount of damage. After that, the middle team will pay $1,000 each, while the most expensive team can pay $15,000 each. When the amount of insurance purchased by someone is equal to the amount that the average person in that risk category would receive from insurance premiums, the insurance rate is considered to be "fairly real."

Dividing individuals into risk categories can be problematic. For e.g., if anyone had a major car crash last year, could that person be listed as a high-risk driver who may have had similar crashes in the future, or as a low-risk driver who is really unfortunate? The driver is likely to be at risk, i.e., the one who may be in the risk category and those who pay the lowest insurance premiums in the future. Insurance providers assume that getting a high risk is an inductance to a high-risk vehicle, but aim to charge the driver with higher insurance premiums.

Behavioural risk refers to a situation in which individuals act in a manner that is more dangerous to insurers than they would have been if they did not have insurance. For example, if you have health care that covers the cost of seeing a doctor, you may be less likely to take action to identify a disease that may require a doctor's appointment. When you have auto insurance, you'll be less worried with speeding or parking your car in situations that make it possible to wreck. In another example, uninsured companies might have high-level surveillance and fire-fighting programmes in order to track fraud and fire.

When it comes to insurance, the same company will only provide lower standards of defence and firefighting programmes. This poses an issue with the lack of details offered by the insurance provider, since high-risk consumers also choose to purchase extra insurance without making the insurance company know about the high risk. For example, someone who buys health insurance or life insurance probably knows more about their family health history than insurance can properly find out from expensive research; a car insurance buyer may not know that you are a high-risk driver who has never been in a major accident-but it is difficult for an insurance company to gather information about how people actually drive.

4. How does the life insurance market provide reclassification risk insurance?


Behavioural risks cannot be eliminated, but insurance providers have clear strategies to reduce their effect. Investigation to deter insurance fraud is one way to reduce the occurrence of moral hazard. Insurance firms may also accept such forms of conduct; to refer to the aforementioned case, they may give a lower property insurance value to the company if the organisation implements a higher fire protection and spraying scheme and the systems are reviewed once a year.

Another way to reduce the risk of behaviour is to ask the victim to cover some of the bill. For example, insurance policies are also deductible from money, which is the sum that the policyholder must spend out of his or her pocket before the insurer can continue to pay. Auto insurance, for example, will cover any damages in excess of $500. Health insurance plans typically have a co-payment, where the policyholder needs to pay a certain amount; for example, one would pay $20 for every doctor's appointment, and the insurance provider will pay the remainder. Another form of risk sharing is currency protection, which ensures that an insurance provider pays a certain amount of expenses. For e.g., the insured will cover 80 per cent of the cost of home repair following the burn, but the homeowner may pay another 20 per cent.

Both of these forms of expense sharing do not negate the risk of behaviour, since people know that they may have to pay more out of their own pocket by making insurance claims. The result can be overwhelming. A remarkable study showed that, when individuals are faced with deductions and health insurance premiums, they spend almost one-third on medical services than people who have full insurance and pay little in their wallets, possibly because deductions and co-payments decrease the possibility of behavioural risk. However, people who ate less health insurance did not seem to have a difference in health status.

The final resort to and the risk of behaviour, which is primarily used in health care, is to concentrate on the motivations of health care providers, not consumers. Traditionally, most health coverage in the United States is provided, which ensures that health care providers are paid for the facilities they offer and are paid extra if they provide other services. However, over the last decade or so, the system of health care delivery has been based on health care organisations (HMOs). The Health Care Organization (HMO) offers standardised healthcare for each person who is participating in the program-no matter how many facilities are given. Under this situation, the covered patient has an opportunity to pursue more treatment, but the health care provider who provides a guaranteed pay-out has an incentive to minimise the risk of behavioural risk by decreasing the volume of care provided-provided that it would not lead to more severe health issues and higher costs later on. 

Today, many physicians pay a mix of managed care and provider fees; that is, a fixed rate per patient, but with extra charges for the management of such health problems. Incomplete data is the source of the behavioural risk.

If the insurance industry has full understanding of risk, it would simply raise its premiums every time the insurance company plans for risky business. However, the organisation cannot track or save all the risks that people face at all times, even though checks are carried out and cost sharing, moral danger remains the same as a challenge.

To consider how an unforeseeable decision will choke the insurance industry, recall the case with 100 drivers purchasing auto insurance, where 60 drivers had the lowest injury of $100 each, 30 drivers had medium injuries costing $1,000 each, and 10 drivers had large accidents costing $15,000 each. This will amount to $186,000 in overall insurance company premiums. 

Let imagine, while the company is aware of the failure, it is not possible to distinguish drivers of high risk, medium risk and low risk. The drivers themselves, however, are aware of their danger categories. As undefined details between the insurance provider and the drivers; the company is expected to fix the insurance price at $1,860 a year to compensate the damage (excluding capital costs and profits). As a result, those with a low chance of just $100 are likely to opt not to purchase insurance; after all, it makes no sense for them to spend $1,860 a year when they might only lose $100. Those with a risk of $1,000 won't even buy insurance. So, the insurance provider ends up offering insurance for just $1,860 to the most disadvantaged drivers who would be priced at $15,000 for each other's claims. Therefore, the company's going to end up wasting revenue. When an insurance provider wants to raise premiums to cover risks at high risk, so people at low to medium risk will be prevented from buying insurance.

Instead of struggling with such a poor decision, an insurance provider can choose not to sell insurance on the market. When there's going to be an insurance market, one of the two factors needs to happen. First, an insurance provider may find some way to identify insurance customers into risk categories with a certain degree of precision and bill them accordingly, which generally means that the insurance company is not attempting to market insurance to anyone who may be at high risk. Second, people at lesser risk should be allowed to buy policies, even though they have to spend more than the fair amount of their risk category. So, if customers continue to purchase insurance, they increase insurance and the government passes rules and laws that impact the insurance sector.

5. What is Cochrane’s proposal to provide reclassification risk insurance in the health insurance market using sequences of short-term contracts? What are the problems in implementing Cochrane’s proposal?


Although the welfare cost of adverse selection is substantial when health status cannot be priced, the risk of reclassification is five times greater when insurers can price on the basis of any health status information. Restrictions on the degree of which insurance status premiums may be based are likely to increase the extent of adverse selection, but reduce the likelihood of reclassification faced by covered persons. At the other end, if unrestricted premiums dependent on health condition were allowed, adverse decisions would be entirely avoided if customers and businesses had the same details. While improved cost-effectiveness of health-related knowledge decreases adverse selection, our long-term welfare findings demonstrate the degree to which such strategies intensify the likelihood of reclassification. The welfare implications of adverse selection of insurance markets by analysing it in the setting of a dynamic exchange in which more than one form of policy is privately supplied and by introducing a long-term factor whereby price control creates a possible trade-off with a chance of reclassification.

There is more restricted literature researching risk reclassification and long-term welfare of insurance markets. Cochrane (1995) analysed dynamic insurance from a solely theoretical viewpoint, finding that, in the absence of asymmetric knowledge, first-class insurance can be accomplished by single-period contracts, which are priced on the basis of individual health status, and which guarantee all current medical costs and improvements in health status, provided that both customers and businesses can agree to the request. Although concentrating on a stagnant marketplace, the probability of reclassification in the employer environment was also evaluated using a two-year time period and the subsidy and price legislation applicable to their broad employer background. The opportunity to borrow following a health shock, or to invest in expectation of potential shocks, may potentially alter our expectations by dramatically lowering the likelihood of reclassification costs.

In the key implementation of our system, we analyse the trade-off between the possibility of adverse selection and reclassification arising from health-based pricing. In this empiric application, we research the welfare effects of health-based pricing over the lifespan of a person. Key parameters use these inputs to research the trade-off between the adverse selection and reclassification risk triggered by various pricing and contract regulations. There are clear consequences for the scientific trade-off between adverse selection and reclassification risk as a result of the various pricing, contract and industry regulations. However, under these price rules, more of the healthiest customers in the community have a higher degree of insurance coverage and are thus less affected by adverse selection. Consumers can be self-assured through dynamic borrowing and saving, and shows that our key observations on the value of reclassification risk in relation to adverse selection remain unchanged.


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    Per 30 min.
  • Quality Check

  • Total


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