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Title: Multiple Contracting in Insurance Markets

Author(s): Andrea Attar, Thomas Mariotti and François Salanié

Publication Date: November 2016

Keyword(s): Adverse Selection, Insurance Markets and Multiple Contracting

Programme Area(s): Financial Economics

Abstract: We study insurance markets in which privately informed consumers can purchase coverage from several insurers. Under adverse selection, multiple contracting severely restricts feasible trades. Indeed, only one budget-balanced allocation is implementable by an entry-proof tariff, and each layer of coverage must be fairly priced given the consumer types who purchase it. This allocation is the unique equilibrium outcome of a game in which cross-subsidies between contracts are prohibited. Equilibrium contracts exhibit quantity discounts and negative correlation between risk and coverage. Public intervention should target insurers' strategic behavior, while consumers can be left free to choose their preferred amount of coverage.

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Bibliographic Reference

Attar, A, Mariotti, T and Salanié, F. 2016. 'Multiple Contracting in Insurance Markets'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=11631