Download This PaperPrice Caps and Efficiency in Markets with Adverse Selection
31 Pages Posted: 14 Apr 2020 Last revised: 6 Feb 2022
Date Written: April 10, 2020
Abstract
This article studies general economies with adverse selection in which symmetric companies supply (potentially multiple) plans to privately informed consumers and compete in terms of price schedules. I show that a basic price cap regulation, in which the price caps are endogenously determined by companies, discourages risk selection over efficient allocations, and therefore, equilibrium exists in every economy. Moreover, I demonstrate that in generalisations of Rothschild and Stiglitz (1976) and Wilson (1977) economies, companies earn zero profits in equilibrium, and every equilibrium allocation is efficient.
Keywords: InsuranceAdverse selectionCompetitionPrice capsExistenceEfficiency
JEL Classification: D82, D86
Suggested Citation: Suggested Citation
Anastasios Dosis (Contact Author)
ESSEC Business School
3 Avenue Bernard Hirsch
B.P 50105
Cergy - Pontoise Cedex, NA 95021
France