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Jessica Brown
Economics

Mark Thoma, Mentor

Moral Hazard as a Market Failure in the Private Provision of Social Insurance

Changes in demographics, specifically a large population of baby boomers reaching retirement age, has led to worries that the current Social Security system will not be able to support such a shift. While privatization remains the most politically supported solution in social security reform, worries about market failure and funding mechanisms prevent privatization from being more widely accepted among economists. For example, imperfect information under the competitive allocation of social insurance leads to market failure, which in turn causes nonoptimality that may require public intervention. The information asymmetry of moral hazard, both on the side of the insurer and the insured, leads to possible market failures if not corrected. Using moral hazard models found in early literature as a foundation for further research, more information concerning these market failures and possible solutions to them arises.