Pricing Institutions and the Welfare Cost of Adverse Selection

American Economic Journal: Microeconomics, Forthcoming

9 Pages Posted: 27 Oct 2013 Last revised: 27 May 2016

See all articles by E. Glen Weyl

E. Glen Weyl

Microsoft Research New York City; RadicalxChange Foundation

Andre Veiga

Imperial College London

Date Written: May 26, 2016

Abstract

To mitigate adverse selection in insurance markets, individuals are often mandated to buy at least a baseline plan, but may choose to opt into a premium plan. In some markets, such as US health exchanges, each plan is responsible for the full expenses of those who buy it (“total pricing”). In other markets, such as the privately-supplied “Medigap” top-ups to traditional government-provided Medicare, premium providers are only responsible for the incremental expenses they top up (“incremental pricing”). For parameter values calibrated to health exchanges, the shift from total to incremental pricing reduces the welfare loss from adverse selection by an order of magnitude.

Keywords: adverse selection, insurance, incremental pricing, total pricing, deadweight loss

JEL Classification: D41, D82, I13

Suggested Citation

Weyl, Eric Glen and Veiga, Andre, Pricing Institutions and the Welfare Cost of Adverse Selection (May 26, 2016). American Economic Journal: Microeconomics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2344812 or http://dx.doi.org/10.2139/ssrn.2344812

Eric Glen Weyl (Contact Author)

Microsoft Research New York City ( email )

641 Avenue of the Americas
7th Floor
New York, NY 10011
United States
8579984513 (Phone)

HOME PAGE: http://www.glenweyl.com

RadicalxChange Foundation ( email )

HOME PAGE: http://www.radicalxchange.org

Andre Veiga

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

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