Insurance....

In class last week we discussed how insurance both mitigates risk and can promote risky behaviors. We were discussing director's and officer's insurance (used to protect members of a company's board). The general statement was that the professor wouldn't take a board seat without being covered by a policy but that it has led to less attentive boards. They don't need to be as watchful, after all, they're protected against personal loss. The same is true in some ways for health insurance. Most people wouldn't visit a doctor for a very minor cold if they were going to have to pay for the whole visit, but they might if it's a very small co-pay. Thomas Sowell also writes about this in Applied Economics.