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Collusion in a One-Period Insurance Market with Adverse Selection

24 Pages Posted: 25 Jul 2008 Last revised: 21 Sep 2009

Alexander Alegría

affiliation not provided to SSRN

Manuel Willington

Escuela de Gobierno - Universidad Adolfo Ibáñez

Date Written: September 1, 2009

Abstract

We show how collusive outcomes may occur in equilibrium in a one-period competitive insurance market characterized by adverse selection. We build on the Inderst and Wambach (2001) model and assume that insurees must pay a minimum premium, which is a common feature in many health systems. In this setup we show that there is a range of equilibria, from the zero profit one in which low-risks implicitly subsidize high risks, to one where firms obtain profits with both types of consumers. Moreover, we show that rents only partially dissipate if we assume free entry.

Along these equilibria, high risks always obtain full insurance while the low risks coverage decreases as the firms' profits increase.

Keywords: adverse selection, collusion, insurance, capacity constraints

JEL Classification: I11, I18, L41

Suggested Citation

Alegría, Alexander and Willington, Manuel, Collusion in a One-Period Insurance Market with Adverse Selection (September 1, 2009). Available at SSRN: https://ssrn.com/abstract=1171862 or http://dx.doi.org/10.2139/ssrn.1171862

Alexander Alegría

affiliation not provided to SSRN

Carlos Manuel Willington (Contact Author)

Escuela de Gobierno - Universidad Adolfo Ibáñez ( email )

Av. Diagonal Las Torres 2640
Peñalolén
Santiago, RM
Chile

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