The theory of adverse selection predicts that high-risk individuals are more likely to buy insurance than low-risk individuals if asymmetric information regarding individuals' risk type is present in the market. The theory of advantageous selection predicts the opposite-a negative relationship between insurance coverage and risk type can be obtained when hidden knowledge in other dimensions (e.g., the degree of risk aversion) is present in addition to the risk type. Using the heterogeneity of insurance buyers in either risk type or risk aversion, we first introduce a classroom-based insurance market simulation game to show that adverse selection and advantageous selection can coexist. We then explain the underlying concepts using two methods: a mathematical framework based on expected utility theory and an empirical framework based on the results of the game itself. The game is easy to implement, reinforces textbook concepts by providing students a hands-on experience, and supplements current textbooks by bringing their content up to date with current research.
Although methods for determining the compensation of a new employee are standardized, those for adjusting an employees compensation over a period of time are not well established. This paper develops an intuitive method for calculating the minimum amount by which an employees compensation must be adjusted taking into account changes in economic conditions since the start of employment. It then translates this result into a worksheet that computes compensation using employee specific informationstarting salary, length of employment, and frequency of compensation adjustments.
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