Unbundling risk

Duke Law Journal

Volumn 60, Issue 6, 2011, Pages 1285-1365

  Fennell, Lee Anne ^a  

^a UNIVERSITY OF CHICAGO LAW SCHOOL   (United States)

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EID: 79952845798     PISSN: 00127086     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (347)

1. A number of scholars have examined various forms of reverse insurance or antiinsurance. See, e.g., GUIDO CALABRESI, THE COSTS OF ACCIDENTS 219-20 (1970) (describing "reverse insurance").
2. Robert Cooter & Ariel Porat, Anti-Insurance, 31 J. LEGAL STUD. 203 (2002) (proposing "anti-insurance" in contract and tort contexts).
3. Steven P. Croley & Jon D. Hanson, The Nonpecuniary Costs of Accidents: Pain-and-Suffering Damages in Tort Law, 108 HARV. L. REV. 1786, 1821, 1883-84, 1893-95 (1995) (discussing "disinsurance").
4. Eric Kades, Windfalls, 108 YALE L.J. 1489, 1496-1500 (1999) (proposing "reverse insurance" for offloading the upside risk of windfalls).
5. George L. Priest, The Current Insurance Crisis and Modern Tort Law, 96 YALE L.J. 1521, 1546 (1987) (noting a potential role for "reverse or anti-insurance"). As the textual example illustrates, there may be both practical and legal obstacles to such transactions.
6. See infra Part III.
7. A robust literature examines the possibility of transacting over such "unmatured" tort claims-that is, claims based on injuries that have not yet occurred. E.g., Robert Cooter, Towards a Market in Unmatured Tort Claims, 75 VA. L. REV. 383, 383-87 (1989).
8. Marc J. Shukaitis, A Market in Personal Injury Tort Claims, 16 J. LEGAL STUD. 329, 334 (1987).
9. Stephen D. Sugarman, Doing Away with Tort Law, 73 CALIF. L. REV. 555, 642-64 (1985).
10. See also ROBERT NOZICK, ANARCHY, STATE, AND UTOPIA 77 (1974) (explaining how a victim's right to payment upon death could compensate him for risk impositions if "[w]hile alive, he can sell the right to this [postmortem compensation] payment, should it have to be made, to a company that purchases many such rights").
11. Madeline Morris, The Structure of Entitlements, 78 CORNELL L. REV. 822, 867 (1993) (illustrating the "[t]ransferred [c]laim rule" with an example in which "Arlene purchases from Gladys any future claims to monetary compensation for injury by Sheldon").
12. Infra Part II.B.1.
13. For a discussion of the potential for, and impediments to, sales of social insurance, see infra Part II.D.3.
14. See ROBERT J. SHILLER, THE NEW FINANCIAL ORDER: RISK IN THE 21ST CENTURY 107-10 (2003) (describing one version of livelihood insurance).
15. See also infra Part II.D.
16. In 1963, Kenneth Arrow posited the possibility of complete markets in risk, which would allow anyone "to bet, at fixed odds, any amount he wishes on the occurrence of any event which will affect his welfare in any way.".
17. KENNETH J. ARROW, Insurance, Risk and Resource Allocation, in ESSAYS IN THE THEORY OF RISK-BEARING 134, 138 (1971) (publishing a lecture originally delivered in the Yrjö Jahnsson lecture series in Helsinki in December 1963).
18. The Arrow-Debreu general equilibrium model, developed in prior work by Arrow and by Gerard Debreu, contemplates complete markets in contingent claims. E.g., DAVID A. MOSS, WHEN ALL ELSE FAILS: GOVERNMENT AS THE ULTIMATE RISK MANAGER 35, 345 n.36 (2002).
19. (Citing Kenneth J. Arrow, The Role of Securities in the Optimal Allocation of Risk-Bearing, 31 REV. ECON. STUD. 91 (1964), translated from the original 1953 French version.
20. GERARD DEBREU, THEORY OF VALUE: AN AXIOMATIC ANALYSIS OF GENERAL EQUILIBRIUM, ch. 7 (1959)).
21. See also Robert Hockett, What Kinds of Stock Ownership Plans Should There Be? Of ESOPS, Other SOPS, and "Ownership Societies," 92 CORNELL L. REV. 865, 945-46 & n.332 (2007) (discussing the intellectual history of "Arrow securities," which pay out based on various states of the world and facilitate trading in risk).
22. For examples of actual and proposed mechanisms for rearranging risk, see infra Part II.
23. If people could shed risk and insurance with equal and perfect ease, law's initial allocations would not stand in the way of efficient reallocations.
24. See R.H. Coase, The Problem of Social Cost, 3 J.L. & ECON. 1 (1960).
25. Derivatives are used by business entities to transfer risk in innumerable ways. PHELIM BOYLE & FEIDHLIM BOYLE, DERIVATIVES: THE TOOLS THAT CHANGED FINANCE, at xi (2001).
26. Indeed, former Chairman of the Federal Reserve Alan Greenspan explicitly described them as adding value by "unbundling risks." Alan Greenspan, Chairman, Fed. Reserve Bd., Remarks Before the Futures Industry Association: Financial Derivatives (Mar. 19, 1999), available at http://www.federalreserve.gov/boarddocs/speeches/1999/19990319.htm.
27. To allude to such risk-shifting mechanisms in the current economic climate invites the reaction that riskrearrangement innovations should be more tightly curtailed rather than made more broadly available. A discussion of the causes of the financial crisis is beyond the scope of this Article, but the difficulties have been broadly associated with the mispricing of risk.
28. For a recent overview, see generally Susan M. Wachter, The Ongoing Financial Upheaval: Understanding the Sources and Way Out, 13 INT'L REAL EST. REV. 218 (2010). It is true that trading in risk is a condition precedent to mispricing it, but pricing flaws can be addressed without dismantling risk markets altogether.
29. Some explicit mechanisms do exist for hedging or insuring against housing-market risks, but these are not in widespread use and are unavailable as a practical matter to the great majority of households.
30. See infra Part II.C.1.
31. For discussion of why people might be interested in shedding this coverage, see infra text accompanying notes 34-35 and infra text accompanying notes 100-02102.
32. Similarly, one can hedge against future price increases in a given local housing market by actually buying a house in that market or in a correlated market.
33. See Todd Sinai & Nicholas S. Souleles, Owner-Occupied Housing as a Hedge Against Rent Risk, 120 Q.J. ECON. 763 (2005).
34. Infra Part I.C.
35. See infra sources cited Part II.B.1, on the sale of unmatured tort claims, infra Part II.C, on the rearrangement of housing-market risk, and infra Part II.D.2, on risk shifting for income and careers.
36. Perhaps the best-developed body of literature addressing the ability to undo background arrangements is in the area of contract default rules.
37. See Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 YALE L.J. 87 (1989).
38. Omri Ben-Shahar & John A.E. Pottow, On the Stickiness of Default Rules, 33 FLA. ST. U. L. REV. 651 (2006).
39. Russell Korobkin, The Status Quo Bias and Contract Default Rules, 83 CORNELL L. REV. 608 (1998).
40. Although relevant to the present discussion-contracts do allocate risk, among other things-a gap remains between this literature and broader questions of risk reversibility among parties who are not otherwise in contractual relationships with each other.
41. The possibility that people may act irrationally in making insurance decisions, and that framing and defaults might play a role, has received significant attention.
42. See, e.g., Eric J. Johnson, John Hershey, Jacqueline Meszaros & Howard Kunreuther, Framing, Probability Distortions, and Insurance Decisions, 7 J. RISK & UNCERTAINTY 35 (1993).
43. Howard Kunreuther & Mark Pauly, Insurance Decision-Making and Market Behavior, 1 FOUND. & TRENDS IN MICROECON. 63, 88-97 (2005).
44. Daniel Schwarcz, Regulating Consumer Demand in Insurance Markets, 3 ERASMUS L. REV. 23, 25-30 (2010).
45. Cass R. Sunstein, Switching the Default Rule, 77 N.Y.U. L. REV. 106, 114-15 (2002).
46. See infra Part IV.B.1.
47. For a discussion of the significance of default selections, see infra Part IV.C.
48. For a discussion of the stickiness inherent in default selections, see infra Part IV.C.1. For ways to adjust the level of stickiness, see infra Part IV.D. Cf. Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, 85 HARV. L. REV. 1089, 1090-92 (1972) (noting that society must make two decisions about entitlements-who will be granted the entitlement and how it will be protected).
49. See infra Part III.A.1.
50. The diminishing marginal utility of money captures the intuition that an additional dollar means more to a person with a small stock of wealth than it does to a wealthy person. RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW 11 (7th ed. 2007).
51. An expected value is the number one gets by multiplying the probability of each outcome by its magnitude and adding the results. People who are risk averse care about the variance in outcomes associated with a given gamble, not just its expected value. See, e.g., JONATHAN BARON, THINKING AND DECIDING 508 (3d ed. 2000) ("Your disutility for losing $100,000 is, probably, more than 100 times your disutility of losing $1,000.").
52. Daniel Kahneman & Amos Tversky, Prospect Theory: An Analysis of Decision Under Risk, 47 ECONOMETRICA 263, 268-69 (1979).
53. Amos Tversky & Daniel Kahneman, The Framing of Decisions and the Psychology of Choice, 211 SCIENCE 453, 457-58 (1981).
54. See also Paul Slovic, Baruch Fischhoff, Sarah Lichtenstein, Bernard Corrigan & Barbara Combs, Preference for Insuring Against Probable Small Losses: Insurance Implications, in PAUL SLOVIC, THE PERCEPTION OF RISK 51, 67-70 (Ragnar E. Löfstedt ed., 2000) (discussing the insurance implications of Kahneman and Tversky's findings).
55. E.g., Richard J. Zeckhauser, Coverage for Catastrophic Illness, 21 PUB. POL'Y 149, 156-57 (1973).
56. David Friedman, What Is 'Fair Compensation' for Death or Injury?, 2 INT'L REV. L. & ECON. 81, 85-87 (1982).
57. Alan Schwartz, Proposals for Products Liability Reform: A Theoretical Synthesis, 97 YALE L.J. 353, 362-64 (1988).
58. W. Kip Viscusi & William N. Evans, Utility Functions That Depend on Health Status: Estimates and Economic Implications, 80 AM. ECON. REV. 353, 371-72 (1990). "Pain and suffering" is used here to refer to those sources of physical disutility that cannot be remediated by additional medical care or medications; to the extent such remediation can be purchased with money, the point in the text would not hold.
59. see also Amartya Sen, Equality of What?, in 1 THE TANNER LECTURES ON HUMAN VALUES 195, 203-04 (Sterling M. McMurrin ed., 1980) (discussing an example in which a "pleasure-wizard" gets much more utility out of money than a person with a disability).
60. David A. Weisbach, Toward a New Approach to Disability Law, 2009 U. CHI. LEGAL F. 47, 71-73 (summarizing literature on welfarism and explaining how disabilities would factor into the analysis).
61. See Christopher K. Hsee & Howard C. Kunreuther, The Affection Effect in Insurance Decisions, 20 J. RISK & UNCERTAINTY 141, 145-46 (2000) (presenting the "consolation hypothesis" to explain experimental results in which people were willing to devote more time to obtain a fixed amount of compensation for a damaged object when asked to imagine that they loved the object).
62. The Friedman-Savage utility curve, which was developed to explain apparent anomalies in risk-related behavior, embodies the hypothesis that there are intervals within which the marginal utility of money is increasing.
63. See Milton Friedman & L.J. Savage, The Utility Analysis of Choices Involving Risk, 56 J. POL. ECON. 279, 298-99 (1948).
64. CHARLES KARELIS, THE PERSISTENCE OF POVERTY 67-81, 127-29 (2007).
65. See infra Part III.A.3-4.
66. For examples of the forms these new combinations might take, as well as a number of existing models that illustrate the range of possibilities, see infra Part II.
67. See infra Part III.B.
68. See infra Part IV. In some cases, allowing new risk transactions might facilitate societal learning by revealing the degree to which existing default risk arrangements diverge from (or, alternatively, track) people's preferred arrangements. The result might be a new default or perhaps even a new (or restored) mandatory arrangement.
69. See infra Part III.B.
70. See Michael B. Abramowicz & Ian Ayres, Compensating Commitments: The Law and Economics of Commitment Bonds that Compensate for the Possibility of Forfeiture 8 (May 20, 2010) (unpublished manuscript), available at http://ssrn.com/abstract=1612396 (describing an "ex post implementation" approach that would work in this way).
71. See also Part IV.B.1, infra, on payment timing.
72. These costs may, however, bear on the choice of a default risk allocation. See infra Part IV.C.1.
73. R could also be an event that will carry in-kind consequences that are positive for Ida, such as favorable weather.
74. HOWARD KUNREUTHER, RALPH GINSBERG, LOUIS MILLER, PHILIP SAGI, PAUL SLOVIC, BRADLEY BORKAN & NORMAN KATZ, DISASTER INSURANCE PROTECTION: PUBLIC POLICY LESSONS 47 (1978) (describing insurance and similar devices as "tickets that can be cashed in for money if certain states of nature occur").
75. Suppose there is a 10 percent chance of R. Under conditions of perfect competition and zero administrative costs, Ida could pay $100 for a ticket that pays out $1,000 if R happens (and $0 if it does not happen), or that, alternatively, relieves her of $1,000 of liability associated with the occurrence of R.
76. It is also important to clarify that the terms "event-enhancing" and "event-detracting" (and the associated figures in this Section) refer only to the alteration in consequences associated with event R, not to the expected value payment that was paid or received to bring it about.
77. The possibilities depicted in the figures in this Section are not exhaustive. In addition to many intermediate cases between those shown, REVEs might intensify rather than offset above- or below-baseline impacts already associated with R.
78. What constitutes a "ditch" in this context is not always straightforward.
79. Such a pure gamble falls somewhat outside the core concerns of this Article, but it offers an intuitive image of an above-baseline REVE.
80. See Richard Craswell, Deterrence and Damages: The Multiplier Principle and Its Alternatives, 97 MICH. L. REV. 2185, 2230 (1999) ("In effect, the introduction of a multiplier turns the liability component of the price into a lottery ticket, with a bigger price up front supporting the chance of a bigger payoff at the end.").
81. see also RICHARD H. THALER & CASS R. SUNSTEIN, NUDGE: IMPROVING DECISIONS ABOUT HEALTH, WEALTH, AND HAPPINESS 211-12 (2008) ("[P]atients are effectively forced to buy a kind of lottery ticket, one that might be worth anything from millions of dollars to nothing. .. ."). Thaler and Sunstein's use of the lottery metaphor includes a focus on erratic jury verdicts and variability in awards and hence has been criticized for suggesting the adjudication process is a random one.
82. Tom Baker & Timothy D. Lytton, Essay, Allowing Patients to Waive the Right to Sue for Medical Malpractice: A Response to Thaler and Sunstein, 104 NW. U. L. REV. 233, 248-49 (2010). But the metaphor, as I use it here, would apply to punitive damages even if the tort system operated with perfect accuracy and consistency; such awards would still attach a positive outcome to a stochastic event-the injury itself-in a manner akin to tacking a lottery payout onto event R.
83. For some exceptions, see infra Part II.
84. This occurs, for example, whenever an individual accepts a less safe product or service at a lower price, takes a less safe job at a higher wage, or gives up a variable future income stream in exchange for a more certain one through an employment contract.
85. See, e.g., RICHARD A. EPSTEIN, CASES AND MATERIALS ON TORTS 915 (9th ed. 2008) (describing "split-award" statutes that require some fraction of punitive-damages awards to be paid to the state).
86. Christine Hurt, The Windfall Myth, 8 GEO. J.L. & PUB. POL'Y 339, 342 n.12 (2010) (discussing Georgia's statutory provision reassigning 75 percent of punitive-damage awards to the state).
87. One complicating factor is the likelihood that earning the projected income in the uninjured state requires work that is time consuming and potentially aversive, as well as other expenditures to support the working lifestyle.
88. See infra Part III.B.1.
89. The examples provided in the cells of Figure 3 are tailored to fit an individual's perspective, but parties taking the other sides of these REVEs (insurers, reverse insurers, manufacturers, and so on) also engage in these same basic moves.
90. Specifically, cell I equates to buying a put option, cell III equates to buying a call option, cell II equates to writing a put option, and cell IV equates to writing a call option. A similar four-square depiction of calls and puts (with layout differences) appears in ROBERT TOMPKINS, OPTIONS EXPLAINED 14 tbl.1.2 (1991). I thank Michael Knoll and other participants at Columbia's law and economics workshop for discussions on these parallels.
91. I do not mean to suggest that calls and puts enable entities to perfectly hedge all risks in all contexts, only that they offer useful and ubiquitous platforms for attempting to do so.
92. See infra Part II.D.
93. See infra Part II.C.1. Financial "collars" that combine a call and a put to narrow the possible range of returns are a familiar example of a hybrid transaction combining cells I and IV.
94. For a recent discussion of why risk-neutral corporations nonetheless buy insurance, see generally Victor P. Goldberg, The Devil Made Me Do It: The Corporate Purchase of Insurance, 5 REV. L. & ECON. 541 (2009).
95. See infra Part II.B.1.
96. The textual discussion assumes that victims and injurers are not able to collude with each other. An incentive for collusion exists because third-party reverse insurance makes the victim and the injurer collectively responsible for twice the loss, whereas their collective exposure to the loss in the absence of the reverse insurer is half that amount. For example, suppose victim A is injured after assigning her claim to reverse insurer C in a world in which B would ordinarily be liable to A. If A and B can keep C from learning about the injury, B can pay A some positive amount that is less than what he would ordinarily have to pay on the claim, and both will be better off.
97. Robert Cooter, Unity in Tort, Contract, and Property: The Model of Precaution, 73 CALIF. L. REV. 1, 3-4 (1985) (describing an efficiency condition in which both parties capable of taking precautions against a given harm are made fully responsible for that harm).
98. See infra Part IV.B.2.
99. Among other things, it would be possible to place limits on the ability of those accepting certain risks to further unbundle and resell those risks where this is deemed necessary to preserve the right risk assessment and pricing incentives. Cutting against this regulatory impulse is the need for thick markets in risk, which free alienability would help to foster. Other restrictions might serve to counter cognitive biases, reduce information asymmetries between the parties, address problems of fraud and collusion, and so on.
100. Which cell to slot the arrangement into depends on whether the loss of life (or, in the case of annuities, longevity) will create the kind of ditch to which money can respond, or whether the proceeds instead represent a kind of gravy that leaves the recipient better off in monetary terms.
101. See, e.g., IT'S A WONDERFUL LIFE (Liberty Films 1946) (featuring a distraught George Bailey who takes to heart Mr. Potter's assessment that he is "worth more dead than alive").
102. "Viatical settlement" refers to the sale of a life insurance policy by a terminally ill person, whereas "life settlement" or "senior settlement" refers to the sale of a life insurance policy by a senior citizen.
103. Jessica Maria Perez, Note, You Can Bet Your Life on It! Regulating Senior Settlements to Be a Financial Alternative for the Elderly, 10 ELDER L.J. 425, 430 (2002).
104. Jennifer Hodson, Clients Cash in Policies-Life-Settlement Industry Sees Growth as People Seek Funds, WALL ST. J., Feb. 4, 2009, at B5A.
105. Although these mechanisms have been criticized, the fact that they allow an investor to profit from an individual's death does not distinguish them from annuities. Alvin E. Roth, Repugnance as a Constraint on Markets, 21 J. ECON. PERSP. 37, 41 (2007).
106. Tontines, named for Lorenzo de Tonti, have taken a variety of forms throughout history but always grant their shareholders some benefit by virtue of survival.
107. See Kent McKeever, A Short History of Tontines, 15 FORDHAM J. CORP. & FIN. L. 491, 491 (2009). In its most dramatic incarnation, group members contributed to a fund that went to the last individual to survive.
108. see also ROBERT LOUIS STEVENSON, THE WRONG BOX (1889) (featuring a plot involving such a tontine). A form of tontine life insurance that paid out for survival as well as for death evolved in the United States in the nineteenth century.
109. Tom Baker & Peter Siegelman, Tontines for the Invincibles: Enticing Low Risks into the Health-Insurance Pool with an Idea from Insurance History and Behavioral Economics, 2010 WIS. L. REV. 79, 85-88.
110. See, e.g., Dying Man Wins Bet He Would Live, BBC NEWS, http://news.bbc.co.uk/2/hi/uk_news/england/beds/bucks/herts/8075288.stm (last updated May 30, 2009, 14:39 GMT) (reporting on a cancer patient who collected £5,000 on each of two bets that he would live to a certain date).
111. See also Rachael Emma Silverman, Letting an Investor Bet on When You'll Die, WALL ST. J., May 26, 2005, at D1 (describing an approach to financing life insurance in which investors may end up owning the policy if the insured survives beyond a two-year loan period).
112. Ariel Porat & Avraham Tabbach, Risk of Death, AM. L. & ECON. REV. (forthcoming 2011) (manuscript at 16-20), available at http://ssrn.com/abstract=1669652.
113. For a recent discussion of liability waivers and the legal limitations on them, see Mark A. Geistfeld, The Value of Consumer Choice in Products Liability, 74 BROOK. L. REV. 781, 800 (2009).
114. see also Richard C. Ausness, "Waive" Goodbye to Tort Liability: A Proposal to Remove Paternalism from Product Sales Transactions, 37 SAN DIEGO L. REV. 293, 294 (2000).
115. And Note, Enforcing Waivers in Products Liability, 69 VA. L. REV. 1111, 1112 (1983).
116. For a recent economic analysis of the effects of products liability waivers, see Albert Choi & Kathryn E. Spier, Should Consumers Be Permitted to Waive Products Liability? Product Safety, Private Contracts, and Adverse Selection 1 (Univ. of Va. Sch. of Law, John M. Olin Law & Econ. Research Paper No. 2010-11, 2010), available at http://www.ssrn.com/abstract=1680932.
117. Transactions could also occur between the point of exposure and the manifestation of harm. See Yair Listokin & Kenneth Ayotte, Protecting Future Claimants in Mass Tort Bankruptcies, 98 NW. U. L. REV. 1435, 1474-75 & n.183 (2004) (discussing asbestos exposure as presenting "inchoate claims," the settlement of which would constitute a form of "antiinsurance").'.
118. See also Ariel Porat & Alex Stein, Liability for Future Harm, in PERSPECTIVES ON CAUSATION (Richard S. Goldberg ed., forthcoming 2011) (manuscript at 26-27), available at http://ssrn.com/abstract=1457362 (proposing that victims be allowed to choose compensation for future harm over compensation for realized harm, in part because this would enable them to make use of money in a state of the world in which they are healthy).
119. See, e.g., STEPHEN D. SUGARMAN, DOING AWAY WITH PERSONAL INJURY LAW: NEW COMPENSATION MECHANISMS FOR VICTIMS, CONSUMERS, AND BUSINESS 202-10 (1989).
120. Robert Cooter & Stephen D. Sugarman, A Regulated Market in Unmatured Tort Claims: Tort Reform by Contract, in NEW DIRECTIONS IN LIABILITY LAW 174 (Walter Olsen ed., 1988).
121. For critiques, see Charles J. Goetz, Commentary on "Towards a Market in Unmatured Tort Claims": Collateral Implications, 75 VA. L. REV. 413 (1989).
122. Alan Schwartz, Commentary on "Towards a Market in Unmatured Tort Claims": A Long Way Yet to Go, 75 VA. L. REV. 423 (1989).
123. This does not necessarily mean that the purchaser would actually end up pursuing a claim if an injury later occurred. For example, some proposals contemplate that the unmatured claims would be purchased by employers and resold in blocks to potential injurers and their insurers, thus "presettling" large numbers of potential claims.
124. see also Jeffrey O'Connell, Harnessing the Liability Lottery: Elective First-Party No-Fault Insurance Financed by Third-Party Tort Claims, 1978 WASH. U. L.Q. 693, 699-700 (noting the potential for two insurance companies holding tort claims of their insureds to engage in a "bulk settlement of all mutual claims").
125. See also Jeffrey O'Connell & Janet Beck, Overcoming Legal Barriers to the Transfer of Third-Party Tort Claims as a Means of Financing First-Party No-Fault Insurance, 58 WASH. U. L.Q. 55, 55-56 (1980).
126. Insurance subrogation represents an existing, limited way in which certain tort claim rights are transferred in exchange for less expensive first-party insurance covering the same risks. I thank Frank Easterbrook for raising this point.
127. New Zealand's system fits this model. A government agency, the Accident Compensation Corporation, provides "no fault" coverage to accident victims, drawing on accounts funded by various taxes and levies.
128. See Peter H. Schuck, Tort Reform, Kiwi-Style, 27 YALE L. & POL'Y REV. 187, 190 (2008).
129. ACC, http://www.acc.co.nz/index.htm (last visited Jan. 23, 2011).
130. For analysis of the potential for markets in legal claims and associated litigation risk, see generally Michael Abramowicz, On the Alienability of Legal Claims, 114 YALE L.J. 697 (2005).
131. Jonathan T. Molot, A Market in Litigation Risk, 76 U. CHI. L. REV. 367 (2009). Transactions in which investors fund lawsuits in exchange for some of the proceeds have become increasingly prevalent.
132. See, e.g., Binyamin Appelbaum, Putting Money on Lawsuits, Investors Share in the Payouts, N.Y. TIMES, Nov. 15, 2010, at A1.
133. Nate Raymond, Attorneys Explore Third-Party Funding in Commercial Disputes, N.Y. L.J., June 3, 2010, at 1.
134. Jonathan D. Glater, Investing in Lawsuits, for a Share of the Awards, N.Y. TIMES, June 3, 2009, at B1. Other risks associated with payouts from legal claims can also be shifted.
135. See, e.g., Adam F. Scales, Against Settlement Factoring? The Market in Tort Claims Has Arrived, 2002 WIS. L. REV. 859, 897-900 (describing settlement factoring transactions, which involve selling rights to payout streams from tort settlements).
136. Peter Lattman & Diana B. Henriques, Speculators Are Eager to Bet on Madoff Claims, N.Y. TIMES DEALBOOK, Dec. 13, 2010, http://dealbook.nytimes.com/2010/12/13/speculators-are-eager-to-bet-on-madoff-claims (noting the longstanding existence of markets for trading in bankruptcy claims and reporting on trades in the Madoff case).
137. For example, chance weather patterns, including wind speed and direction, may greatly affect the impacts associated with effluents. Jonathan Remy Nash & Richard L. Revesz, Markets and Geography: Designing Marketable Permit Schemes to Control Local and Regional Pollutants, 28 ECOLOGY L.Q. 569, 578, 580 (2001).
138. See Lee Anne Fennell, Property and Half-Torts, 116 YALE L.J. 1400, 1468-69 (2007) (distinguishing between liability rules that shift the costs of realized harm and those that impose liability based on expected harm).
139. "Selling coverage" in this context means that the defendant retains the permanent damages that she would otherwise pay to the plaintiff and agrees in exchange to cover any actual harm from her activities that materializes.
140. For a recent article detailing the existing limits on liability for unrequested benefits and proposing an "expanded duty of restitution," see Ariel Porat, Private Production of Public Goods: Liability for Unrequested Benefits, 108 MICH. L. REV. 189 (2009).
141. Suppose a legal regime makes neighbor A liable for part of the cost of a fence constructed by neighbor B if that fence bestows benefits on A. That liability might be operationalized in either of the following ways: (1) neighbor A might be required to pay when an appraisal upon resale establishes that value has been added, or (2) A might be required to pay upfront for the expected value added. The former arrangement leaves B with the risk that the benefits will not materialize, whereas the latter places that risk on A. Either arrangement could be reversed using gravy-gamble or gravy-giveup REVEs.
142. See INTRADE PREDICTION MARKETS, http://www.intrade.com (search for "tax" and "cap and trade") (last visited Feb. 5, 2011) (listing contracts for changes in U.S. tax rates and for the establishment of a cap-and-trade system).
143. See also Jason Ruspini, Tax Futures "In Real Life," RISK MARKETS & POL. (Feb. 6, 2008, 11:55 PM), http://riskmarkets.blogspot.com/2008/02/tax-futures-reality.html (discussing the introduction of tax futures on Intrade.com).
144. See, e.g., Steve P. Calandrillo, Eminent Domain Economics: Should "Just Compensation" Be Abolished, and Would "Takings Insurance" Work Instead?, 64 OHIO ST. L.J. 451, 499-521 (2003).
145. Eric Kades, Avoiding Takings "Accidents": A Torts Perspective on Takings Law, 28 U. RICH. L. REV. 1235, 1238-47, 1270-72 (1994).
146. Louis Kaplow, An Economic Analysis of Legal Transitions, 99 HARV. L. REV. 509, 527-28, 537-49, 602-06 (1986).
147. See Types of Coverage, MULTILATERAL INVESTMENT GUARANTY AGENCY, http://www.miga.org/guarantees/index_sv.cfm?stid=1547 (last visited Jan. 23, 2011) (offering insurance against expropriation, including "creeping" expropriation, against governmental acts or omissions that make it impossible to convert or transfer currency, and against losses from "[w]ar, terrorism, and civil disturbance"). I thank Nicole Garnett for alerting me to these policies.
148. See, e.g., DANIEL SHAVIRO, WHEN RULES CHANGE 40-42 (2000).
149. Lawrence Blume & Daniel L. Rubinfeld, Compensation for Takings: An Economic Analysis, 72 CALIF. L. REV. 569, 571-72 (1984).
150. See generally Jonathan S. Masur & Jonathan Remy Nash, The Institutional Dynamics of Transition Relief, 85 N.Y.U. L. REV. 391 (2010) (discussing the potential role of government-provided transition relief in light of the unavailability of private insurance).
151. For example, a number of scholars have noted that the government could pay landowners for "takings options" that would permit the government to condemn without paying just compensation for improvements on the land.
152. See, e.g., William A. Fischel & Perry Shapiro, Takings, Insurance, and Michelman: Comments on Economic Interpretations of "Just Compensation" Law, 17 J. LEGAL STUD. 269, 274 (1988) (describing this possibility and citing antecedent literature).
153. For an overview of past, proposed, and existing programs and products for rearranging homeownership risk, see generally Lee Anne Fennell, Homeownership 2.0, 102 NW. U. L. REV. 1047 (2008).
154. For an overview of the purposes and potential of home equity insurance, see generally Robert J. Shiller & Allan N. Weiss, Home Equity Insurance, 19 J. REAL ESTATE FIN. & ECON. 21 (1999).
155. Some localities have experimented with forms of home equity insurance. See, e.g., Maureen A. McNamara, The Legality and Efficacy of Homeowner's Equity Assurance: A Study of Oak Park, Illinois, 78 NW. U. L. REV. 1463 (1984).
156. Andrew Caplin, William Goetzmann, Eric Hangen, Barry Nalebuff, Elisabeth Prentice, John Rodkin, Matthew Spiegel & Tom Skinner, Home Equity Insurance: A Pilot Project (Yale Int'l Ctr. for Fin., Working Paper No. 03-12, 2003), available at http://ssrn.com/abstract_id=410141.
157. This would enable a homeowner to finance her purchase using equity as well as debt. See, e.g., Andrew Caplin, James H. Carr, Frederick Pollock & Zhong Yi Tong, with Kheng Mei Tan & Trivikraman Thampy, Shared-Equity Mortgages, Housing Affordability, and Homeownership, 18 HOUSING POL'Y DEBATE 209, 217 (2007).
158. See Todd M. Sinai & Nicholas S. Souleles, Can Owning a Home Hedge the Risk of Moving? 2-3 (Nat'l Bureau of Econ. Research, Working Paper No. w15462, 2009), available at http://ssrn.com/abstract=1498963 (finding that households "tend to move between highly covarying housing markets," which makes the purchase of the first home work as an effective hedge against the second home).
159. Compare, e.g., Lance Freeman & Frank Braconi, Gentrification and Displacement, New York City in the 1990's, 70 J. AM. PLANNING ASSOC. 39, 51 (2004) ("Our analysis indicates that rather than speeding up the departure of low-income residents through displacement, neighborhood gentrification in New York City was actually associated with a lower propensity of disadvantaged households to move.").
160. With Kathe Newman & Elvin K. Wyly, The Right to Stay Put, Revisited: Gentrification and Resistance to Displacement in New York City, 43 URBAN STUD. 23, 30-31, 47-52 (2006) (discussing ways in which data on displacement may understate the phenomenon and noting the role of housing policies such as rent regulation in mitigating gentrification's displacement effects).
161. On the importance to tenants of the right to remain, see Margaret Jane Radin, Residential Rent Control, 15 PHIL. & PUB. AFF. 350, 359-63, 368-70 (1986).
162. Florence Wagman Roisman, The Right to Remain: Common Law Protections for Security of Tenure: An Essay in Honor of John Otis Calmore, 86 N.C. L. REV. 817, 820-29 (2008).
163. The contrast between the situations of tenants and homeowners is often less stark than the statement in the text might suggest. For example, tenants in many localities enjoy some protection against displacement, whereas some mortgage products, such as those with adjustable rates, undermine the usual price protection associated with homeownership.
164. See, e.g., BRENDAN O'FLAHERTY, CITY ECONOMICS 369 (2005) ("Tenants could get a long-run stake in the community if they were required to buy some variety of security that was pegged to the town's or neighborhood's total property value.").
165. Robert I. Lerman & Signe-Mary McKernan, Promoting Neighborhood Improvement While Protecting Low-Income Families, OPPORTUNITY & OWNERSHIP PROJECT (Urban Inst., D.C.), May 2007, at 2, available at http://www.urban.org/UploadedPDF/311457_Promoting_Neighborhood.pdf (proposing use of a "tradable option" for tenants that "would be a financial asset linked to an index of area rents").
166. Robert I. Lerman, Promoting Neighborhood Improvement While Protecting Low-Income Families 6-12 (Nov. 8, 2008) (unpublished manuscript, presented at the 29th Research Conference, Association for Public Policy Analysis and Management) (on file with the Duke Law Journal) (expanding on the proposal for financial options for tenants).
167. see also Lee Anne Fennell & Julie Roin, Controlling Residential Stakes, 77 U. CHI. L. REV. 143 (2010) (discussing how local governments might make such instruments available to tenants).
168. Alan Schwarz, Buying Low: Minor Leaguer Takes Stock of Himself, N.Y. TIMES, Feb. 1, 2008, at D1.
169. Newsom tabled his plan, and is now attending law school at Boston College, Tetanus Shots, Law School Anxieties, and Baseball Road Trips, AFTER THE NINTH (Aug. 26, 2009), http://rnewsom.wordpress.com/2009/08/26/tetanus-shots-law-school-anxietiesand-baseball-road-trips.
170. When a Novelist Holds an IPO, FREAKONOMICS (Aug. 1, 2008, 1:02 PM), http://freakonomics.blogs.nytimes.com/2008/08/01/when-a-novelist-holds-an-ipo.
171. See Christine Hurt, One More Time: Selling Fractional Interests in Your Career or Your Work Product Will Take You for a Ride Through Securities Law-Even if You Are an "Ant Trading a Mote of Sand for a Leaf or Something," THE CONGLOMERATE (Aug. 5, 2008), http://www.theconglomerate.org/2008/08/one-more-time-s.html (discussing regulatory issues). Selling equity rights to a future income stream can be distinguished from using a future income stream to secure a bond. A number of athletes, including White Sox player Frank Thomas, have attempted to securitize guaranteed future income streams as a way of raising money.
172. GIL FRIED, STEVEN J. SHAPIRO & TIMOTHY D. DESCHRIVER, SPORT FINANCE 178 (2d ed. 2008). "Bowie bonds" represented a similar effort at securitization, albeit one based on an income stream that proved fickle.
173. See Karen Richardson, Bankers Hope for a Reprise of "Bowie Bonds," WALL ST. J., Aug. 23, 2005, at C1.
174. Betting markets in prospective Nobel Prize awards have already developed. A New Zealand company, iPredict, offered contracts on the 2010 Nobel Prize in Economics. Tyler Cowen, Economic Nobel Odds at iPredict, MARGINAL REVOLUTION (Oct. 6, 2010, 7:58 AM), http://www.marginalrevolution.com/marginalrevolution/2010/10/economics-nobel-odds-atipredict.html. Both 2009 winners of the Nobel in economics (Elinor Ostrom and Oliver Williamson) were given 50:1 odds by a U.K.-based betting site, Ladbrokes.
175. Greg Mankiw, Nobel Odds, GREG MANKIW'S BLOG (Oct. 8, 2009), http://gregmankiw.blogspot.com/2009/10/nobelodds. html. Nobel prospects have also figured in divorce settlements.
176. See Jason English, Odd Facts About Nobel Prize Winners, CNN.COM, http://www.cnn.com/2009/LIVING/wayoflife/10/06/mf.nobel.odd.facts/index.html (last updated Oct. 6, 2009 2:27 PM).
177. See MILTON FRIEDMAN, CAPITALISM AND FREEDOM 102-04 (1962) (explaining shortfalls of "fixed money loans" in the context of human capital investment and discussing the potential to contract over equity stakes in future earnings).
178. For a dystopian take on an allencompassing system of equities in individuals, see generally DANI KOLLIN & EYTAN KOLLIN, THE UNINCORPORATED MAN (2009).
179. Royalties do commonly provide authors and artists a continuing share of the upside potential, but these are usually a small fraction of the overall proceeds. Termination provisions in copyright law also place some limits on the ability to permanently alienate rights to creative works.
180. JULIE E. COHEN, LYDIA PALLAS LOREN, RUTH L. OKEDIJI & MAUREEN O'ROURKE, COPYRIGHT IN A GLOBAL INFORMATION ECONOMY 177-80 (2d ed. 2006) (citing 17 U.S.C. §§ 203, 304(c), 304(d) (2006)).
181. See Jorge Alonso & Richard Watt, Efficient Distribution of Copyright Income, in THE ECONOMICS OF COPYRIGHT: DEVELOPMENTS IN RESEARCH AND ANALYSIS 81, 89. (Wendy J. Gordon & Richard Watt eds., 2003) ("[Advance payment of royalties] is equivalent to the distributor insuring the artist, since if the royalties due never turn out to reach the up-front payment amount, then it is the distributor that suffers the loss.").
182. U.K.-based Bandstocks allows fans to invest in bands through their websites in exchange for specified benefits, including shares of the bands' future income. BANDSTOCKS, http://www.bandstocks.dloadshop.com (last visited Jan. 23, 2011).
183. see also Owen Gibson, Don't Just Buy the Music, Fans Told-Now You Can Invest in Big Names of the Future, GUARDIAN (Aug. 27, 2008), http://www.guardian.co.uk/business/2008/aug/27/musicindustry.investing (reporting on Bandstocks).
184. Other companies offering similar approaches include another U.K. company, SlicethePie, SLICETHEPIE, http://www.slicethepie.com (last visited Jan. 23, 2011).
185. And Amsterdam-based Sellaband, SELLABAND, http://www.sellaband.com (last visited Jan. 23, 2011).
186. For discussion and critique of limits on the alienability of human capital, see generally Stewart E. Sterk, Restraints on Alienation of Human Capital, 79 VA. L. REV. 383 (1993).
187. Similarly, college athletes might be persuaded to delay entering the draft by insurance against the effect of injuries on their professional prospects, even though colleges are restricted from providing them with upfront cash payments.
188. Thomas W. Hazlett & Joshua D. Wright, Hell No, Don't Let Them Go!, CHI. TRIB., May 8, 2008, at 25.
189. see also Jedediah Purdy, A Freedom-Promoting Approach to Property: A Renewed Tradition for New Debates, 72 U. CHI. L. REV. 1237, 1272-78 (2005) (discussing Shiller's proposal).
190. Robert Hockett, Just Insurance Through Global Macro-Hedging: Information, Distributive Equity, Efficiency, and New Markets for Systemic-Income-Risk-Pricing and Systemic-Income-Risk-Trading in a "New Economy," 25 U. PA. J. INT'L ECON. L. 107, 214-26 (2004).
191. Federally guaranteed student loans now build in protection against low earnings by capping payments at 15 percent of the amount by which the borrower's income exceeds 150 percent of the poverty line and forgiving amounts remaining due after twenty-five years if payment requirements or other criteria are met (ten years if in public service); For loans issued after July 1, 2014, the payment cap will drop to 10 percent and the maximum time to forgiveness will be reduced to twenty years. Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152, § 2213, 124 Stat. 1029, 1081 (amending 20 U.S.C. § 1098e).
192. Mary Pilon, Exploiting the New Student-Loan Rules, WALL ST. J., May 8, 2010, at B8.
193. See also MIGUEL PALACIOS LLERAS, INVESTING IN HUMAN CAPITAL: A CAPITAL MARKETS APPROACH TO STUDENT FUNDING 41-123 (2004) (exploring the possibility of "human capital contracts").
194. E.G. West, The Yale Tuition Postponement Plan in the Mid-Seventies, 5 HIGHER ED. 169, 169-75 (1976) (analyzing Yale's income-contingent loan program).
195. Ron Lieber, Aid for Students Facing Mountain of Debt, N.Y. TIMES, Aug. 15, 2009, at B1 (reviewing past proposals and a new innovation called "SafeStart" that would provide an interest-free credit line to repay student loans if earnings are low in the early years out of school).
196. See Ron Lieber, Insure Yourself Against a Job Loss? Good Luck., N.Y. TIMES, Aug. 8, 2009, at B1 (surveying some attempted and proposed programs).
197. Private insurance against one manifestation of unemployment is found in Hyundai's recent "assurance" program permitting car buyers who finance or lease their vehicles to return them upon job loss (and other specified events) for up to one year without being responsible for up to $7,500 in negative equity. Assurance Homepage, HYUNDAI, http://www.hyundaiusa.com/assurance/index.aspx (last visited Jan. 23, 2011).
198. See Gillian Lester, Unemployment Insurance and Wealth Redistribution, 49 UCLA L. REV. 335, 362-65 (2001) (discussing difficulties in privately insuring against unemployment).
199. See infra Part III.B.1.
200. GRETCHEN ROWE & MARY MURPHY, URBAN INST., WELFARE RULES DATABOOK: STATE TANF POLICIES AS OF JULY 2006, at 15 (2008), available at http://www.urban.org/UploadedPDF/411686_welfare_databook06.pdf.
201. In some state programs, the diversion payments either do not delay TANF eligibility or do so for a period of time that is equal to or less than that in which the diversion sum would have been expended through TANF's monthly payments. Other state programs, however, delay TANF eligibility for two, three, or even four times as long as the period in which an equivalent amount of monthly TANF payments would have been made. The effect stated in the text would of course be buffered to the extent that families suffering acute needs remain eligible for other (non-TANF) sources of public assistance, or receive private assistance.
202. Steven Levitt, for example, has stated that he would gladly give up tenure for a $15,000 salary increase. Steven D. Levitt, Let's Just Get Rid of Tenure (Including Mine), FREAKONOMICS (Mar. 3, 2007, 11:31 PM), http://freakonomics.blogs.nytimes.com/2007/03/03/lets-just-get-rid-of-tenure.
203. See, e.g., David M. Cutler & Richard Zeckhauser, Extending the Theory to Meet the Practice of Insurance, 2004 BROOKINGS-WHARTON PAPERS ON FIN. SERVICES 1, 21 (noting the potential appeal of such coverage as well as its rarity). For example, "gene insurance" procured before genetic testing occurs would enable individuals to affordably purchase health insurance that is accurately priced based on genetic information.
204. See Alexander Tabarrok, Gene Insurance, in ENTREPRENEURIAL ECONOMICS: BRIGHT IDEAS FROM THE DISMAL SCIENCE 47, 47-48 (Alexander Tabarrok ed., 2002).
205. Reed Abelson, UnitedHealth to Insure the Right to Insurance, N.Y. TIMES, Dec. 2, 2008, at B1 (describing a policy that allows a consumer to buy insurance at a later date).
206. Tyler Cowen, Insurance Markets in Everything, MARGINAL REVOLUTION (Dec. 3, 2008, 10:02 AM), http://www.marginalrevolution.com/marginalrevolution/2008/12/insurance-marke.html (discussing the UnitedHealth policy).
207. Kyle Logue & Joel Slemrod, Genes as Tags: The Tax Implications of Widely Available Genetic Information, 61 NAT'L TAX J. 843, 859 (2008). But even this pre-conception insurance might come too late given the effect of the parents' genetic endowments on their children's expected genetic endowments.
208. On one view, the transaction insures one against running out of funds during a period of continued good health, when such funds are especially necessary and utility producing. This interpretation would line up at least roughly with ditch coverage. The idea is analogous to that behind an annuity, where the hazard in question is outliving one's wealth. An alternative interpretation would be that one is buying a lottery ticket that may provide an upside payoff to augment the good luck of remaining healthy; this would amount to a gravy gamble.
209. One might view the agreement to give up funds in the event of poor health as leaving one exposed to an unremediated ditch. If money is less utility producing when one is in a state of poor health, however, the forgone funds may represent a form of gravy that one would rather sell off one's rights to receive.
210. The "housing partnerships" idea developed by Andrew Caplin and his coauthors similarly contemplates investors going in with homeowners on their home purchases and sharing rights to equity, although for different reasons and pursuant to different sharing rules.
211. See generally ANDREW CAPLIN, SEWIN CHAN, CHARLES FREEMAN & JOSEPH TRACY, HOUSING PARTNERSHIPS: A NEW APPROACH TO A MARKET AT A CROSSROADS (1997). Another analogue is found in schemes in which an elderly individual signs over rights to a property upon her death (in effect, selling the home subject to a reserved life estate).
212. See Flavia Kraus-Jackson & Flavia Rotondi, Death Offers Lifeline to Italian Property as Economy Worsens, BLOOMBERG (Feb. 25, 2009, 6:01 PM), http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a46kTFrO8guY&ref (describing "nude sales" in which ownership passes but the seller has the right to life-long occupancy). More generally, future interests in land embed risk allocations. Again, the life estate is a prime example insofar as it provides a hedge to the beneficiary occupying the property and moves actuarial risk to the party holding the residual claim.
213. See Adam J. Hirsch, Spendthrift Trusts and Public Policy: Economic and Cognitive Perspectives, 73 WASH. U. L.Q. 1, 58 n.210 (1995).
214. see also Adam J. Hirsch & William K.S. Wang, A Qualitative Theory of the Dead Hand, 68 IND. L.J. 1, 35-36 (1992) (noting the risk-shifting characteristics of contingent or defeasible interests).
215. Whether too much is spent at the end of life is a difficult question. For a recent economic analysis of terminal care, see generally Tomas J. Philipson, Gary Becker, Dana Goldman & Kevin M. Murphy, The Value of Life Near Its End and Terminal Care (Nat'l Bureau of Econ. Research, Working Paper No. 15649, 2010), available at http://www.nber.org/papers/w15649.pdf.
216. For example, social policies that direct resources toward those raising children have the effect of buffering some of the financial impacts of procreation. Family law, too, can affect the ways in which certain risks are allocated among individuals, families, and society as a whole.
217. See generally Anne L. Alstott, Private Tragedies? Family Law as Social Insurance, 4 HARV. L. & POL'Y REV. 3 (2010).
218. Private shifting of familial risks might also be attempted. One company has announced plans to offer a "guaranty" on marriage. Marriage Insurance, SAFEGUARD GUARANTY CORP., http://www.safeguardguaranty.com/Investors3.html (last visited Jan. 23, 2011).
219. See also Robin Hanson, Marriage Futures, OVERCOMING BIAS (Oct. 22, 2007, 6:00 AM), http://www.overcomingbias.com/2007/10/marriage-future.html (discussing the potential market for "marriage futures").
220. Dave Hoffman, Should You Buy Divorce Insurance?, CONCURRING OPINIONS (Aug. 2, 2007, 11:44 AM), http://www.concurringopinions.com/archives/2007/08/should_you_buy_1.html (discussing obstacles to divorce insurance and describing Safe Guard's product as an "investment vehicle," not insurance).
221. See Philip J. Cook & Daniel A. Graham, The Demand for Insurance and Protection: The Case of Irreplaceable Commodities, 91 Q.J. ECON. 143, 149 n.14 (1977).
222. Nando Di Fino, A New Kind of Pocket Protection, WALL ST. J., Sept. 1, 2009, http://online.wsj.com/article/SB10001424052970203550604574360691019757738.html.
223. Weather futures have already claimed an important niche market among those in weather-sensitive industries.
224. See, e.g., Come Rain or Come Shine, ECONOMIST, Feb. 10, 2007, at 78, 78-79.
225. Weather Products, CME GROUP, http://www.cmegroup.com/trading/weather (last visited Jan. 23, 2011).
226. For a discussion of the capitalization of local goods and services into home values, see WILLIAM A. FISCHEL, THE HOMEVOTER HYPOTHESIS 39-51 (2001).
227. For an analysis of the degree to which local laws are capitalized into property values and wages, see generally Anup Malani, Valuing Laws as Local Amenities, 121 HARV. L. REV. 1273 (2008).
228. A good is "lumpy" if it exhibits indivisibilities, so that having a mere portion of the good does not deliver a proportionate amount of utility. See, e.g., Michael Taylor & Hugh Ward, Chickens, Whales, and Lumpy Goods: Alternative Models of Public-Goods Provision, 30 POL. STUD. 350, 353 (1982) (discussing public goods that "cannot be usefully provided in any amounts but only in more or less massive 'lumps'").
229. A desire for indivisible blocks of consumption provides one possible explanation for lottery play. A formal exploration of this point is provided in Ng Yew Kwang, Why Do People Buy Lottery Tickets? Choices Involving Risk and the Indivisibility of Expenditure, 73 J. POL. ECON. 530 (1965).
230. see also Edward J. McCaffery, Why People Play Lotteries and Why It Matters, 1994 WIS. L. REV. 71, 99-105. (discussing the "indivisibility of expenditure" rationale for risk seeking through lotteries).
231. The same basic idea likely supports many other gambles-for instance, betting on one's team to win, where the money to fund a really good celebration and the psychic payoff of a win are complementary goods. People might also bet on good vacation weather, favorable medical outcomes, or any other event or condition with consequences that would increase the marginal utility of money.
232. Cf. Thomas W. Merrill & Henry E. Smith, Optimal Standardization in the Law of Property: The Numerus Clausus Principle, 110 YALE L.J. 1, 24-42 (2000) (examining optimal standardization in the property context by weighing "frustration costs" to the parties of limited forms against the costs that customization may impose on the system and on third parties).
233. "Legally permitted" turns out not to be a binary on/off classification, given that innumerable regulatory frictions, as well as asymmetries in the delivery of tax benefits and the like, can discourage new arrangements without banning them outright.
234. Pinpointing exactly what causes certain kinds of financial markets to thrive while others fail is notoriously difficult.
235. See, e.g., Susan J. Smith, Managing Financial Risks: The Strange Case of Housing, in MANAGING FINANCIAL RISKS: FROM GLOBAL TO LOCAL 233, 240-42, 250. (Gordon L. Clark, Adam D. Dixon & Ashby H.B. Monk eds., 2009) (noting various possibilities and observing that "most experts agree that there is always a 'factor 13'-an element that defies generalization, yet which can be accounted for" among the conditions supporting a successful new derivatives market).
236. See Kenneth J. Arrow & Robert C. Lind, Uncertainty and the Evaluation of Public Investment Decisions, 60 AM. ECON. REV. 364, 366 (1970) ("[T]he fact that someone has insurance may alter his behavior so that the observed outcome is adverse to the insurer.").
237. For example, a potential tort victim in a strict liability regime might wish to contract with her potential injurer to downgrade coverage to negligence only, yet this customization would be unworkable unless courts in such regimes were willing to make negligence determinations. I thank Saul Levmore for discussions on this point.
238. Lior Jacob Strahilevitz, "How's My Driving?" for Everyone (and Everything?), 81 N.Y.U. L. REV. 1699, 1726-29, 1752-54 (2006) (describing the potential role of new forms of monitoring and information sharing in the pricing of risk).
239. Robert J. Shiller & Allan N. Weiss, Moral Hazard in Home Equity Conversion, 28 REAL EST. ECON. 1, 2, 27-28 (2000) (suggesting the use of home-price indexes in arrangements for shifting home-value risk).
240. See Michael Abramowicz & John F. Duffy, Intellectual Property for Market Experimentation, 83 N.Y.U. L. REV. 337, 354-60 (2008) (analyzing potential impediments to market experimentation).
241. In this respect, risk innovation resembles a public good that the private market may be likely to underprovide. See ROBERT J. SHILLER, MACRO MARKETS: CREATING INSTITUTIONS FOR MANAGING SOCIETY'S LARGEST ECONOMIC RISKS 207-08 (1993) (discussing the "tendency for under-investment in the creation of new markets").
242. ("The establishment of new markets, because of the public nature of its benefits, is one of the most fitting places for government subsidy.").
243. Howard Kunreuther, Limited Knowledge and Insurance Protection, 24 PUB. POL'Y 227 (1976) (observing that people in flood- and earthquake-prone areas often lack awareness of the relevant risks and of the availability and cost of insurance).
244. Switching from one risk arrangement to another may induce regret if it turns out badly; knowing this, people may avoid change. See Robert E. Scott, Error and Rationality in Individual Decisionmaking: An Essay on the Relationship Between Cognitive Illusions and the Management of Choices, 59 S. CAL. L. REV. 329, 340 (1986) (describing how "regret aversion" may lead people to avoid making choices).
245. For an examination of the potential effect of anticipated regret on new markets in housing risk, see Robert J. Shiller, Derivatives Markets for Home Prices 17-20 (Nat'l Bureau of Econ. Research, Working Paper No. 13962, 2008), available at http://www.nber.org/papers/w13962.pdf.
246. Bets that involve life and death seem to produce especially strong reactions, and markets in everything from life insurance to predictions of terrorism risks have been affected. See Michael Pereira, Risk Management for the Age of Information, 9 FORDHAM J. CORP. & FIN. L. 715, 732-33 (2004).
247. See Cass R. Sunstein, On the Expressive Function of Law, 144 U. PA. L. REV. 2021, 2040 (1996) (suggesting that people's reluctance to insure against certain losses could be a function of social norms).
248. (citing Cass R. Sunstein, Social Norms and Social Roles, 96 COLUM. L. REV. 903 (1996)).
249. Some of these peer effects may relate to predictions about how forthcoming outside assistance will be in the event of a loss; the more unusual it is to be uninsured, the less likely one might judge such assistance.
250. Even if some people would value such coverage, there is reason to believe that many others would not. Whether demand for such coverage would exist in the absence of tort law has been the subject of much scholarly discussion.
251. For an overview of the literature on this question and some new empirical findings, see generally Ronen Avraham, Should Pain-and-Suffering Damages Be Abolished from Tort Law? More Experimental Evidence, 55 TORONTO L. REV. 941 (2005).
252. See William A. Fischel, Why Are There NIMBYs?, 77 LAND ECON. 144, 146 (2001) (analogizing the purchase of a home to the purchase of undiversified stock in the local housing market).
253. Robert J. Shiller, Radical Financial Innovation, in ENTREPRENEURSHIP, INNOVATION, AND THE GROWTH MECHANISM OF THE FREE-ENTERPRISE ECONOMIES 306, 320 (Eytan Sheshinski, Robert J. Strom & William Baumol eds., 2007) (noting psychological barriers to the adoption of new risk-management mechanisms and suggesting that innovative framing could overcome them).
254. Mattias K. Polborn, Mandatory Insurance and the Judgment-Proof Problem, 18 INT'L REV. L. & ECON. 141, 143-44 (1998).
255. S. Shavell, The Judgment Proof Problem, 6 INT'L REV. L. & ECON. 45, 54 (1986).
256. See generally Steven Shavell, Minimum Asset Requirements and Compulsory Liability Insurance as Solutions to the Judgment-Proof Problem, 36 RAND J. ECON. 63 (2005) [hereinafter Shavell, Minimum Asset Requirements] (analyzing and comparing minimum asset requirements and mandatory liability insurance as approaches to the problem of judgment-proof defendants).
257. To the extent social insurance increases the tendency to do without private insurance, the problem is one of moral hazard.
258. The government is often referred to in these terms. See, e.g., ARYE L. HILLMAN, PUBLIC FINANCE AND PUBLIC POLICY: RESPONSIBILITIES AND LIMITATIONS OF GOVERNMENT 340 (2003).
259. Cf. TERESA A. SULLIVAN, ELIZABETH WARREN & JAY LAWRENCE WESTBROOK, AS WE FORGIVE OUR DEBTORS: BANKRUPTCY AND CONSUMER CREDIT IN AMERICA 173-74 (1989) (characterizing bankruptcy as "an insurer of last resort").
260. The Social Security Act, for example, provides that [t]he right of any person to any future payment under this subchapter shall not be transferable or assignable, at law or in equity, and none of the moneys paid or payable or rights existing under this subchapter shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law. 42 U.S.C. § 407(a) (2006).
261. See also David Andolfatto, A Theory of Inalienable Property Rights, 110 J. POL. ECON. 382, 383-84 (2002) (discussing the inalienability of a variety of entitlements, including rights to social security benefits and future pension income, as well as the rationale for these limits).
262. See Todd J. Zywicki & Joseph D. Adamson, The Law and Economics of Subprime Lending, 80 U. COLO. L. REV. 1, 30-32 (2009) (discussing state antideficiency laws and their effect on default choices).
263. See Thomas H. Jackson, The Fresh-Start Policy in Bankruptcy Law, 98 HARV. L. REV. 1393, 1418-24 (1985) (detailing a variety of externalities that would flow from debt in the absence of debtor discharge). Internalities may also play a role.
264. Infra Part III.B.2.
265. The relationship between bankruptcy and other forms of social insurance is explored more fully in Adam Feibelman, Defining the Social Insurance Function of Consumer Bankruptcy, 13 AM. BANKR. INST. L. REV. 129 (2005).
266. See also Richard M. Hynes, Non-Procrustean Bankruptcy, 2004 U. ILL. L. REV. 301, 350-59, for a discussion of bankruptcy's place within "a larger social safety net.".
267. See Michelle J. White, Abuse or Protection? Consumer Bankruptcy Reform Under 'BAPCPA,' 18-19 ÉCONOMIE PUBLIQUE 3, 5 (2006) (explaining that bankruptcy law "balances conflicting objectives of helping debtors in financial distress versus promoting credit availability by protecting creditors").
268. (noting the impact of greater protections for debtors on credit price and availability).
269. See Wei Fan & Michelle J. White, Personal Bankruptcy and the Level of Entrepreneurial Activity, 46 J. L. & ECON. 543 (2003) (developing a theoretical model for, and empirically testing, the relationship between the size of the bankruptcy exemption and entrepreneurship levels).
270. see also F.H. Buckley, The Debtor as Victim, 87 CORNELL L. REV. 1078, 1089 (2002).
271. (Reviewing TERESA A. SULLIVAN, ELIZABETH WARREN & JAY LAWRENCE WESTBROOK, THE FRAGILE MIDDLE CLASS: AMERICANS IN DEBT (2000)) (suggesting that "bankruptcy might be a particularly useful incentive device in attracting employees to work in high-risk jobs, such as start-up ventures").
272. See R.J. Herrnstein, George F. Loewenstein, Drazen Prelec & William Vaughan, Jr., Utility Maximization and Melioration: Internalities in Individual Choice, 6 J. BEHAV. DECISION MAKING 149, 150 (1993) (defining "internality" as a "within-person externality").
273. There is a vast literature on time preferences. For a helpful overview, see generally Shane Frederick, George Loewenstein & Ted O'Donoghue, Time Discounting and Time Preference: A Critical Review, in TIME AND DECISION: ECONOMIC AND PSYCHOLOGICAL PERSPECTIVES ON INTERTEMPORAL CHOICE 13. (George Loewenstein, Daniel Read & Roy Baumeister eds., 2003). It is also often observed that people prefer lump sums over presentvalue-equivalent (or larger) streams of payments.
274. See David Fetherstonhaugh & Lee Ross, Framing Effects and Income Flow Preferences in Decisions About Social Security, in BEHAVIORAL DIMENSIONS OF RETIREMENT ECONOMICS 187, 194-96, 202-03, 206-07 (Henry J. Aaron ed., 1999) (discussing and investigating this claim).
275. See infra Part IV.B.1.
276. See infra Part IV.B.2 for an explanation of how triangular REVEs may help to address some risk-heterogeneity problems, and Part IV.C.2 for an examination of how heterogeneity in default stickiness might interact with risk preferences to impact adverse-selection problems.
277. See, e.g., KENNETH J. ARROW, Information and Economic Behavior, in 4 COLLECTED PAPERS OF KENNETH J. ARROW: THE ECONOMICS OF INFORMATION 136, 147-48 (1984) (explaining how information asymmetries can create adverse-selection problems in insurance markets).
278. see also Michael Rothschild & Joseph Stiglitz, Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information, 90 Q.J. ECON. 629, 632 (1976) (noting the pricing problem presented when insureds have private information about accident probabilities). The dynamic produced by such information asymmetries can also unravel markets other than those in risk.
279. See, e.g., George A. Akerlof, The Market for "Lemons": Quality Uncertainty and the Market Mechanism, 84 Q.J. ECON. 488, 489-92 (1970) (illustrating this problem using the example of used cars).
280. See Tom Baker, Containing the Promise of Insurance: Adverse Selection and Risk Classification, 9 CONN. INS. L.J. 371, 375-76 (2003) (noting the origins of the term "adverse selection" in the insurance industry).
281. See Genetic Information Nondiscrimination Act of 2008, Pub. L. No. 110-233, 122 Stat. 881 (codified in scattered sections of 26, 29, and 42 U.S.C.) (prohibiting genetic discrimination in group health insurance plans and employment).
282. The potential for good risks to be driven from an insurance pool as a result of adverse selection has been noted by many scholars. E.g., Kenneth S. Abraham, Environmental Liability and the Limits of Insurance, 88 COLUM. L. REV. 942, 946 (1988).
283. Peter Siegelman, Adverse Selection in Insurance Markets: An Exaggerated Threat, 113 YALE L.J. 1223, 1237-38 (2004).
284. see also David M. Cutler & Richard J. Zeckhauser, Adverse Selection in Health Insurance 22-27 (Nat'l Bureau of Econ. Research, Working Paper No. 6107, 1997), available at http://www.nber.org/papers/w6107 (discussing a variety of strategies that might be used to combat adverse selection).
285. Even if both good and bad risks would prefer full coverage, the two groups cannot be separated without making the package designed for good risks sufficiently unattractive to bad risks-which would typically involve reducing the level of coverage.
286. See, e.g., Jennifer Arlen, Contracting over Liability: Medical Malpractice and the Cost of Choice, 158 U. PA. L. REV. 957, 1000-03 (2010) (discussing adverse selection as an impediment to private contracting over medical malpractice liability).
287. Another potential domain in which adverse selection might operate in this context involves individual differences in "capacity to suffer.".
288. For a recent review of the empirical literature on adverse selection in insurance markets, see Alma Cohen & Peter Siegelman, Testing for Adverse Selection in Insurance Markets, 77 J. RISK & INS. 39 (2010).
289. Pierre-André Chiappori & Bernard Salanié, Testing for Asymmetric Information in Insurance Markets, 108 J. POL. ECON. 56 (2000) (finding no evidence of asymmetric information in an analysis of insurance contracts and accidents for young drivers in France). An adverse-selection dynamic can also be produced if the law requires insurers to ignore information that insureds are free to act upon.
290. For a foundational treatment of propitious selection, see David Hemenway, Propitious Selection, 105 Q. J. ECON. 1063 (1990).
291. More recent explorations of propitious or advantageous selection include, for example, David de Meza & David C. Webb, Advantageous Selection in Insurance Markets, 32 RAND J. ECON. 249 (2001).
292. Hanming Fang, Michael P. Keane & Dan Silverman, Sources of Advantageous Selection: Evidence from the Medigap Insurance Market, 116 J. POL. ECON. 303 (2008).
293. See infra Part IV.C.2.
294. Analogous points about the interdependence of choices to opt in or out have been made in other contexts. See, e.g., ALBERT O. HIRSCHMAN, EXIT, VOICE, AND LOYALTY 44-54 (1970) (analyzing the effects on institutions of the exit of those who, had they stayed, would have been the most vocal in seeking change).
295. Jeffrey N. Gordon, The Puzzling Persistence of the Constrained Prudent Man Rule, 62 N.Y.U. L. REV. 52, 80-81 (1987) (suggesting that the ability of parties to contract around a trust-investment rule may dissipate the will to litigate or to lobby for legislation that would improve the rule for everyone).
296. Other analyses of the numerus clausus doctrine in property law include Bernard Rudden, Economic Theory v. Property Law: The Numerus Clausus Problem, in OXFORD ESSAYS IN JURISPRUDENCE, 3D SERIES 237 (John Eekelaar & John Bell eds., 1987).
297. Nestor Davidson, Standardization and Pluralism in Property Law, 61 VAND. L. REV. 1597 (2008).
298. and Henry Hansmann & Reinier Kraakman, Property, Contract, and Verification: The Numerus Clausus Problem and the Divisibility of Rights, 31 J. LEGAL STUD. 373 (2002).
299. See, e.g., Marcel Kahan & Michael Klausner, Standardization and Innovation in Corporate Contracting (or "The Economics of Boilerplate"), 83 VA. L. REV. 713 (1997).
300. Henry E. Smith, Modularity in Contracts: Boilerplate and Information Flow, 104 MICH. L. REV. 1175 (2006).
301. Evidentiary rules could keep specific information about a given plaintiff's reverseinsurance transactions from jurors, but that would not eliminate the problem flagged in the text. The problem is ameliorated to the extent sales of unmatured tort claims would foster large settlements of claims en masse so that individual cases would rarely go to trial if the underlying claim had been sold.
302. Below, I will consider some additional justifications for differential treatment and some possible ways to address the concerns underlying those rationales.
303. See infra Part IV.B-D.
304. Cf. Ronen Avraham & Issa Kohler-Hausmann, Accident Law for Egalitarians, 12 LEGAL THEORY 181, 187-88 (2006) (raising similar questions about the dramatically different treatment that different kinds of bad luck receive).
305. People are said to discount hyperbolically if their valuation of a reward drops off dramatically as it moves from the immediate present into the near future, but levels off in the more distant future; the shape of the valuation over time forms a hyperbola. See GEORGE AINSLIE, BREAKDOWN OF WILL 32 & fig. 2B (2001) (depicting a hyperbolic discount curve).
306. David Laibson, Golden Eggs and Hyperbolic Discounting, 112 Q. J. ECON. 443, 446-51 (1997) (presenting a formal analysis of hyperbolic discounting).
307. The possibility that cognitive biases might cancel each other out in such ways has received theoretical attention as a manifestation of the general theory of the second best. E.g., Gregory Besharov, Second-Best Considerations in Correcting Cognitive Biases, 71 S. ECON. J. 12 (2004).
308. This is not to deny that altering the payment timing will have some impact on individuals' other risk sets, aside from the specific risk being transacted over. For example, delaying payment means introducing some risk that death will occur first for reasons unrelated to the risky event that is the subject of the REVE. Similarly, delays keep people from gaining immediate access to funds that might be used in the interim for risky investments or additional REVE transactions. If people could use the prospect of the upcoming payments as collateral for immediate loans, this latter set of constraints would be lifted, although possibly at the cost of defeating the purpose of the change in timing and form. The cognitive response triggered by an immediate lump sum of cash in hand, however, may be quite different from the knowledge that one can use the dollar amount to obtain financing.
309. See infra Part IV.C.
310. Scholars have noted the general difficulty in determining when an individual's choice should be viewed as a "mistake." See, e.g., Mario J. Rizzo & Douglas Glen Whitman, The Knowledge Problem of New Paternalism, 2009 BYU L. REV. 905, 926-28.
311. Cass R. Sunstein, Human Behavior and the Law of Work, 87 VA. L. REV. 205, 225-26 (2001).
312. (Noting signaling concerns in the employment context). Of course, transacting with a third party would not help if the persons to whom one fears sending an adverse signal would be aware of that transaction, as might be the case if concerns are mostly about the signals sent to loved ones or even to oneself.
313. For further discussion of the signaling properties of insurance, see Robin Hanson, Insurance as Signal, OVERCOMING BIAS (Sept. 14, 2009, 9:45 PM), http://www.overcomingbias.com/2009/09/insurance-as-signal.html.
314. For example, an employee who insures against a failure to receive a promotion might wish to keep this information from her employer in order to avoid signaling a low degree of confidence that could translate into negative results at work.
315. Some of the best-known research on the power of default rules is in the context of 401(k) plans, where automatic enrollment has been found to significantly impact savings behavior.
316. See, e.g., James J. Choi, David Laibson, Brigitte C. Madrian & Andrew Metrick, Passive Decisions and Potent Defaults, in ANALYSES IN THE ECONOMICS OF AGING 59 (David A. Wise ed., 2005).
317. Bridgette C. Madrian & Dennis F. Shea, The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior, 116 Q.J. ECON. 1149 (2001).
318. See Thomas J. Miles, Posner on Economic Loss in Tort: EVRA Corp. v. Swiss Bank, 74 U. CHI. L. REV. 1813, 1817-18 (2007).
319. See, e.g., Isaac Dinner, Eric J. Johnson, Daniel G. Goldstein & Kaiya Liu, Partitioning Default Effects: Why People Choose Not to Choose 3 (June 26, 2009) (unpublished manuscript), available at http://ssrn.com/abstract=1352488 (collecting citations and identifying three categories of reasons for default stickiness: "effort," "implied endorsement," and "reference dependence").
320. See Cass R. Sunstein & Richard H. Thaler, Libertarian Paternalism Is Not an Oxymoron, 70 U. CHI. L. REV. 1159, 1181 (2003). Empirical work suggesting that making decisions is cognitively draining supports this effect.
321. See Roy F. Baumeister, The Psychology of Irrationality: Why People Make Foolish, Self-Defeating Choices, in 1 THE PSYCHOLOGY OF ECONOMIC DECISIONS: RATIONALITY AND WELL-BEING 3, 12-14 (Isabelle Brocas & Juan D. Carrillo eds., 2003) (reviewing literature on "decision fatigue").
322. See also Brett H. McDonnell, Sticky Defaults and Altering Rules in Corporate Law, 60 SMU L. REV. 383, 392-93 (2007) (discussing the use of Fuller's work by Ayres and Gertner).
323. For discussion of research on the asymmetry between commission and omission, see, for example, RICHARD H. THALER, THE WINNER'S CURSE: PARADOXES AND ANOMALIES OF ECONOMIC LIFE 73 (1992).
324. Daniel Kahneman, Varieties of Counterfactual Thinking, in WHAT MIGHT HAVE BEEN: THE SOCIAL PSYCHOLOGY OF COUNTERFACTUAL THINKING 375, 388-92 (Neal J. Roese & James M. Olson eds., 1995).
325. Daniel Kahneman & Amos Tversky, The Psychology of Preferences, SCI. AM., Jan. 1982, at 160, 173.
326. See Sean J. Griffith, Uncovering a Gatekeeper: Why the SEC Should Mandate Disclosure of Details Concerning Directors' and Officers' Liability Insurance Policies, 154 U. PA. L. REV. 1147, 1168 (2006) ("Insurance premiums reflect not only the policy's risk-an actuarially determined probability of loss-but also a loading fee reflecting the insurer's costs and profits.").
327. Recent empirical work has explored heterogeneity in risk preferences. See Rachel Croson & Uri Gneezy, Gender Differences in Preferences, 47 J. ECON. LIT. 448, 449-54 (2004) (reviewing experimental findings on the greater risk aversion of women, discussing possible reasons, and noting exceptions in managerial and professional subsets).
328. Peggy D. Dwyer, James H. Gilkeson & John A. List, Gender Differences in Revealed Risk Taking: Evidence from Mutual Fund Investors, 76 ECON. LETTERS 151, 156-57 (2002) (finding evidence that women accept less investment risk than men, as well as positive effects of wealth and education on willingness to take investment risks).
329. Jonah Gelbach, Jonathan Klick & Lesley Wexler, Passive Discrimination: When Does It Make Sense to Pay Too Little, 76 U. CHI. L. REV. 797, 817-19 (2009) (reviewing empirical literature on gender differences in risk preferences).
330. Luigi Guiso & Monica Paiella, Risk Aversion, Wealth, and Background Risk, 6 J. EUROPEAN ECON. ASSOC. 1109, 1109, 1141-42 (2008) (examining the relationship between wealth and risk aversion, as well as other aspects of heterogeneity in risk preferences).
331. Thomas Dohmen, Armin Falk, David Huffman & Uwe Sunde, Are Risk Aversion and Impatience Related to Cognitive Ability? 100 AM. ECON. REV. 1238, 1257 (2010) (finding, in a study of German adults, greater risk aversion among people with lower scores on an IQ test).
332. Daniel J. Benjamin, Sebastian A. Brown & Jesse M. Shapiro, Who Is "Behavioral"? Cognitive Ability and Anomalous Preferences 1 (May 5, 2006) (unpublished manuscript), available at http://ssrn.com/abstract=675264 (finding, in a study of Chilean high school students, less "small-stakes" risk aversion among those with higher scores on standardized tests). Another interesting line of work assesses the degree of correlation in risk preferences across domains.
333. E.g., Levon Barseghyan, Jeffrey Prince & Joshua C. Teitelbaum, Are Risk Preferences Stable Across Contexts? Evidence from Insurance Data, AM. ECON. REV. (forthcoming), available at http://ssrn.com/abstract=1220663.
334. Liran Einav, Amy Finkelstein, Iuliana Pascu & Mark R. Cullen, How General Are Risk Preferences? Choices Under Uncertainty in Different Domains (Nat'l Bureau of Econ. Research, Working Paper No. 15686, 2010).
335. Perhaps suggestive on this point is evidence on when low-risk insureds do and do not drop out of policies with "guaranteed renewability" provisions that insure against selective experience-rated increases in policy premiums. See SCOTT E. HARRINGTON & GREGORY R. NIEHAUS, RISK MANAGEMENT AND INSURANCE 351-52 (2d ed. 2004) (attributing the availability of guaranteed renewability provisions for individuals and the resistance to such provisions in small-group insurance settings in the period prior to legal mandate to the higher transaction costs of switching for individuals).
336. This assumes, as seems plausible, that the funding mechanism for public insurance draws from individuals in a pattern that differs from the price structure each would encounter in purchasing private insurance.
337. Although the example in the text focuses on genetic risks, the same analysis would apply to preexisting conditions or any other factor that society might view as normatively inappropriate to factor into the cost of coverage.
338. See, e.g., Deborah S. Hellman, Is Actuarially Fair Insurance Pricing Actually Fair? A Case Study in Insuring Battered Women, 32 HARV. C.R.-C.L. L. REV. 355 (1997) (examining insurers' use of domestic violence victim status in coverage and premium determinations and legislation restricting that practice).
339. Of course, some increment would have to be deducted from this amount to cover administrative costs; I have omitted that point from the textual example for simplicity.
340. But see Gregory Mitchell, Libertarian Paternalism Is an Oxymoron, 99 NW. U. L. REV. 1245, 1254 (2005) (rejecting the idea that one can infer anything about preferences from outcomes produced solely by an inertial response to a default).
341. The converse approach-not allowing a reversal alternative unless the original alternative is separately priced-is discussed below.
342. See infra text accompanying notes 320-21.
343. Justin Sydnor, (Over)insuring Modest Risks, 2 AM. ECON. J.: APPLIED ECON. 177, 177-79 (2010).
344. For a discussion of such strategies, see, for example, Howard Kunreuther & Mark Pauly, Neglecting Disaster: Why Don't People Insure Against Large Losses?, 28 J. RISK & UNCERTAINTY 5, 16 (2004).
345. In-kind impositions (waiting periods, extra mouse-clicks, queues) are usually thought to be especially costly because they destroy value outright rather than merely transferring it elsewhere.
346. See, e.g., DONALD N. MCCLOSKEY, THE APPLIED THEORY OF PRICE 342-43 (1982).
347. See, e.g., Mark Geistfeld, The Political Economy of Neocontractual Proposals for Products Liability Reform, 72 TEX. L. REV. 803, 821-23 (1994).