DP11631 Multiple Contracting in Insurance Markets
|Author(s):||Andrea Attar, Thomas Mariotti, François Salanié|
|Publication Date:||November 2016|
|Keyword(s):||Adverse Selection, Insurance Markets, Multiple Contracting|
|JEL(s):||D43, D82, D86|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=11631|
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.