Product Design in Selection Markets
Nuffield College, Oxford University
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, I13working papers series
Date posted: September 30, 2011 ; Last revised: February 15, 2014
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