Riding the Tiger: Managing Risk in U.S. Housing Finance and Health Insurance Welfare Markets

Abstract

This article examines the political and economic dynamics of welfare markets in the USA. These marketplaces differ from other public-private welfare arrangements in that the state crafts and sustains these markets with the aim of using competition to promote cost-effective welfare provision. However, welfare markets face fundamental tensions between competition and stability that we trace to the allocation of risk between the state and private providers. Faced with the prospect of bearing potential losses, private firms often deploy instruments to reduce risk, lobby for risk protections from policymakers, or threaten to exit the market. The result is markets that are either non-competitive but stable, or competitive but unstable. In short, when policymakers create welfare markets they are riding a tiger, making themselves vulnerable to the functioning of markets over which they have imperfect control. We theorize and illustrate these dynamics through analyses of mortgage securitization, Medicare Advantage markets and the Obamacare health exchanges. This article contributes to the study of the US welfare state, speaks to the perils of marketized welfare in rich democracies and shows how market reforms can lead to unexpected state expansion.