DP16531 Regulating Insurance Markets: Multiple Contracting and Adverse Selection

Author(s): Andrea Attar, Thomas Mariotti, François Salanié
Publication Date: September 2021
Date Revised: September 2021
Keyword(s): Adverse Selection, Insurance Markets, Multiple Contracting, Regulation
JEL(s): D43, D82, D86
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16531

This paper studies an insurance market on which privately informed consumers can simultaneously trade with several firms operating under a regulation that prohibits cross-subsidies between contracts. The regulated game supports a single equilibrium allocation in which each layer of coverage is fairly priced given the consumer types who purchase it. This competitive allocation cannot be Pareto-improved by a social planner who observes neither consumers' types nor their trades with firms. Public intervention under multiple contracting and adverse selection should thus arguably target firms' pricing strategies, leaving consumers free to choose their preferred amount of coverage.