Coase Colored Glasses

Archive for February 1st, 2011

Adverse Selection

As athletes, we deal with adverse selection. There are times, especially during the season of our sport, where we deal with pain and discomfort from the typical wear and tear our sport has on our bodies. There are other times when we withhold information from coaches and trainers. We do not want to be held out of practice or, especially, games. We gamble, trying to predict the consequences of whether or not we should say something. If an injury happens in season, there are incentives, especially if the pain or discomfort is tolerable, not to tell someone. To be honest, what I think would be the best approach would be to get the tests done to determine the extent of the injury, but not be told the results until the off-season providing no further damage would be done. Then, when there is time for any necessary surgery and physical therapy, take the needed steps to prepare the athlete for the next season. What the athlete is gambling the most is the worsening of the injury. That is always a possibility, just as having the surgery is no guarantee that the injury will be fixed. There have been many athletes disqualified from participating at Division-I level after an injury. Sometimes, even after what would seem to be a routine surgery, for example, an ACL reconstruction, they do not get cleared to play. Maybe the ACL is too loose to perform properly or maybe the athlete’s muscles never fired properly to redevelop strength. Is hiding an injury really worth the gamble of finishing out the season? What about the future after sports, say, playing with kids, or just working out to stay healthy and in shape?

Open Eyes to Insurance

Before I ever took an economics class, I always thought that insurance salesman were scoundrels.  My parents always complained about the enormous rates they had to pay for protection.  Another reason they may have been mad was that I can only remember 2 instances where one of my family members had to visit the hospital all my growing up years, we never got in a car accident, nor did we ever have fire or water damage (good karma I guess), and yet we still paid high prices.  Because of Friedman’s discussion of insurance, I know that insurance companies provide valuable service to society, but that my family was an example of an asymetric information problem.  David Friedman explains that the people who buy insurance are usually the ones who will be using their policies (70).  This places risk on the company, so they must raise the rate they charge to assume the risk.  When my safe father buys a policy and “trades his eleven cheap dollars for ten expensive ones (61), he actually ends up trading borderline expensive dollars for expensive ones to get a “certain future”(64).

So what does this mean for my childhood assumption that insurance companies were crooked?  It’s not true.  The insurance men want to sell their ability to protect against damages, and profit off those who buy but don’t collect. The fact that people want to buy insurance from them is evidence that they should not sell them coverage (69).  They are attempting to earn money by speculation, but so is anyone who invests in anything.  They are at risk as much as someone who may never collects.