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Product Design in Selection Markets

Andre Veiga

University of Oxford - Nuffield College

E. Glen Weyl

Microsoft Research New England; University of Chicago

February 15, 2014

Insurers choose plan characteristics to sort for profitable consumers. In a model with multidimensional types, this sorting incentive is proportional to the covariance, among marginal consumers, between marginal willingness-to-pay and cost to the insurer. Standard forms of cost-sharing successfully repel costly consumers, but reducing plan comprehensiveness instead alienates the risk-averse. In a perfectly competitive equilibrium, the sorting incentive must vanish. Market power increases insurance quality and welfare. Nonetheless, a competitive equilibrium with positive insurance is possible when insurance value is sufficiently negatively correlated with cost. However, in a calibration to Handel, Hendel and Whinston (2013)’s data, equilibrium still fails to exist.

Number of Pages in PDF File: 43

Keywords: selection markets, cream-skimming, insurance markets, multidimensional heterogeneity, product design

JEL Classification: D41, D42, D43, D86, I13

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Date posted: September 30, 2011 ; Last revised: February 15, 2014

Suggested Citation

Veiga, Andre and Weyl, E. Glen, Product Design in Selection Markets (February 15, 2014). Available at SSRN: http://ssrn.com/abstract=1935912 or http://dx.doi.org/10.2139/ssrn.1935912

Contact Information

Andre Veiga
University of Oxford - Nuffield College ( email )
New Road
Oxford, OX1 1NF
United Kingdom
HOME PAGE: http://www.andreveiga.com
Eric Glen Weyl (Contact Author)
Microsoft Research New England ( email )
One Memorial Drive, 14th Floor
Cambridge, MA 02142
United States
(857) 998-4513 (Phone)
HOME PAGE: http://www.glenweyl.com
University of Chicago ( email )
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Chicago, IL 60637
United States
(773) 702-4862 (Phone)
(773) 702-8490 (Fax)
HOME PAGE: http://www.glenweyl.com
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