Adverse Selection in Disability Payments
The Great Silence by Juliet Nicolson presents information on disability payments to injured World War I veterans:? 16 shillings per week (80 pence to those unfamiliar with older British money) for the loss of a right arm, 15 shillings for the loss of a left arm. Since about 90 percent of people are right-handed, this is more?equitable than the reverse.? But why not equality?? I assume the argument was that for most people (right-handers), the loss of a left arm was less serious, so it should be compensated less.
Why not pay the same, higher rate for a right-arm loss by right-handers, left-arm loss by left-handers? Were the authorities worried that people would claim that, whichever arm was lost, it was the one they used most-essentially?adverse selection? Were the administrative costs of determining handed-ness in offering compensation too high to overcome this selection problem?