WRITING 149: WHY UNIVERSAL HEALTHCARE MUST HAVE A MANDATE?

[[8.22PM-8.39PM, 17MIN]

Despite the republicans’ grudge, universal healthcare must be mandatory. Without it, the market will collapse, resulting in prohibitively expense premium.

The logic can be explained by adverse selection under information asymmetry. An oversimplified reasoning is follows. People differ in their pre-conditions, which are their private information. Insurance firms, however, do not know people’s pre-conditions. So the premium is priced for the average condition, in the sense that the premium equals the coverage times the risk (the probability of being sick). But then those whose health condition is above the average (hence lower risk) is better off not to buy the insurance, because the premium is more than their benefit (coverage times the risk). Hence adverse selection occurs. After their withdrawal, only those riskier people still want to buy the insurance. But then the premium (price) must increase to the new level of benefit (coverage times higher risk), to reflect the risk profile of the remaining pool. Then adverse selection occurs again. The same line of argument shows that more people will opt out.

Without mandate, this degradation process will continue until only the most risky people remain to buy the insurance, at highest price. Certainly, this is not governments intended: to reduce the price, the healthcare must have broad base, to ensure that healthy ones subsidize unhealthy ones.

Here is an interesting sidenote. Despite being a conservative, the chief justice Roberts seems to understand this economic logic well. So he casted the deciding vote for Obama care. Interestingly, his does not tread the political ground; rather, he interpret the mandate as a tax, which saves him a lot of political headache.

2015-07-24 13.41.11

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Writing: HLD notes

I took three days to work out the missing steps.

In this project, we argue that the flexible regime dominates the mandatory one. Intuitively the logic is simple. But the math is not straightforward. This is because two regimes differ substantially in objectives and hence policies, which defy the direct comparison.

We solve this problem by relating them to the second best. We do so in two steps. First, we define the common structure. The central notion here is the virtual cost. Second, we parameterize each regime by its deviation from the second best (in terms virtual cost).

This approach provides a unified framework to compare the flexible and mandatory regimes. It overcomes the structural difference by teasing out their the common core.

There are two caveats, though. First, in the flexible regime the agent decides production, whereas in the mandatory regime the principal decides. Second, although each the principal may not see all the types, we still define its payoff function for each type. This hypothetical treatment poses no harm.

Currently, PL is working on the case with additional budget constraint. That constraint is necessary for explaining the logic of exporting trade. It makes economic sense and numerically it works. Just wait to see the details.

Book: scarcity

Insightful about human behavior. it starts strong, but second half reads flat and chaotic.

The main concepts are scarcity, bandwidth, focus, and tunneling. The main point is, scarcity leads to both focus and tunneling. Focus improves productivity, but tunneling reduces performance. Hence, the poor is likely to be trapped in poverty because scarcity reduces bandwidth and hence productivity; they are more vulnerable to random shocks.

Small but frequent deadlines are more effective than a grand one.

Essentially, this is a layman version of the constrained optimization: the scarcity is imposed by the constraints. The more constrained you are, the worse the performance.

\max_{x \in X} f(x)

Here the scarcity is captured by X.

The insight that slack can improve productivity can be expressed by:

If X_1 \subset X_2, then \max_{X_1} f \le \max_{X_2} f.

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