Tuesday, February 09, 2010

Protecting Consumers

Becker and Posner both address the creation of the Consumer Financial Protection in the US. This agency emerges from the Obama administration partly in response to the arguably ill-informed decisions made by financial consumers during the last 10 years, and is heavily grounded in the behavioural ideas of Thaler and Sunstein. Posner argues that the current wave of regulation is excessive and gives the examples of smoking health warnings back in the 1960s and food safety inspections as legitimate forms of consumer protection. The difference between these and the financial decision making case, according to Posner, is that the market failure is clear in the case of both smoking and food safety legislation and the potential remedies are clear and welfare enhancing. He argues that potential market failures from poor financial decision making are harder to demonstrate and to remediate, leading to poorly targeted and expensive government regulation. He argues for obesity as a case where there may be a case for intervention arising from the high health-care cost externality resulting from elevated population chronic illness prevalance.

Becker is even tougher on the bill.

"I believe that a Consumer Financial Protection Agency will hurt rather than help consumers. Despite the claim that ignorance induced many consumers with few resources to buy houses during the boom, consumers who bought a house then with almost no down payment and low interest rates were not displaying ignorance, but good sense." 

He makes the classical argument against behavioural intervention.

"In the vast majority of cases, consumers, even those with little education, know their own interests far better than government officials know them."

Becker is also far tougher on obesity externality arguments than Posner, arguing that they distort consumer decisions. He leans on the side of allowing insurers to price obesity into insurance costs, a debate that would be worth having here. 


Peter Carney said...

Pricing that reflects risk makes good sense.

Objective risky behaviours could be easily priced into health insurance plans--it's standard practice to do so for life assurance.

It doesn't affect the principle of 'community rating' if we believe that these behaviours (eating, drinking, smoking)are within our control, in the way that age and gender aren't.

By applying a loading you incentivise preventative effort and natural self-protection which mediate the occurrence of illness. When we don't: we create an environment that erodes this effort -- as my work on behavioural moral hazard discusses.

I suspect one basic reason we don't do it is due to the fact that those without insurance fall-back on public insurance and so, a la Rothschild-Stiglitz, it's good for the public purse if risky folk remain pooled in private insurance, making it expensive for them wouldn't be smart. This could be altered by changing the structures of the public system so that behaviours are factored into the pricing there too.

I've been thinking about these issues for a while - the big debate is only around the corner. From a quick analysis of google 'insights' its clear that health insurance is on peoples' mind in Ireland, this year more than ever before -- most likely as a result of large increases in premium prices.

The reality is that healthy people are not going to get able to continue carrying the can for their chubby boozy peers. To be fair, the negative externalities should be priced into these behaviours, a la the polluter pays principle.

There is a lot that could be done to improve welfare by ensuring that the healthier choice (i.e., the one with no negative externalities) is the easier choice.

Liam Delaney said...

Peter - is there any sense to the view that its hard to price obesity fairly into health insurance as some people have genetic predispositions whereas some people (like me) simply don't take good enough care of themselves. From the point of view of efficient pricing, this shouldn't matter. But from an equity point of view, it would seem unfair that someone with a genetic endowment or a serious illness would pay more and also it would not act as an incentive to improve behaviour.

Peter Carney said...

The mechanism for pricing would have to have to be sophisticated; serious thought and analysis would be required to design it, but it is possible.

One idea that comes to mind is physician diagnosis. Physicians are the best placed to offer a distinction between patient's diathesis and patient's behaviour. There might be significant administrative costs associated with this idea but it would certainly be a way.

Even with diathesis, except perhaps in exceptionally rare cases, obesity is not congenital and impervious to moderation. Perhaps disease-related bands or categories could be established (if there don't already exist) so that people could aim and be rewarded for achieving healthier and manageable body weight.

Another possible less resource demanding way is to estimate the full actuarial cost of (in this case) obesity and then, from available medical evidence, adjust it to account for genetic (non-choice) parts and behavioural (choice) parts. Insurance companies currently calculate much more complex equations; this one would not be any struggle.

Of course in areas such as smoking this is less of an issue. As I mentioned previously, all Life Assurance policies add a premium load for smokering and the insurance principle of Utmost Good Faith (or cotinine in blood) ensures this works.

Also, think of the signal here.

Somebody has just put a actuarial price on the cost of my current deleterious behaviour, as reflected in the premium differential. The general public simply don't have the mathematical ability or data to do this themselves. So it's highly useful information and a powerful signal that requires attention.

Well-considered pricing would effectively reward preventive effort and remove hazardous distortions created by blanket pricing; it is in everybody's interest.