Economic efficiency and mixed public/private insurance

In this paper we discuss the efficiency properties of insurance markets where supplementary private insurance is allowed to exist together with a compulsory government insurance plan. Our main conclusion, which is contrary to both those of Besley (1989) and Selden (1993), is that in a simple model focusing on the moral hazard problem alone, a mixed system will generally be strictly less efficient than a purely private (competitive) system. We also show that Selden's (1993) main proposition is valid only in very special circumstances, which reduces the significance of his result on the welfare properties of systems of mixed government/private insurance. (C) 1997 Elsevier Science S.A.