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

E. Glen Weyl

Microsoft Research; Yale University

Andre Veiga

University of Oxford - Nuffield College

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, E. 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 ( email )

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

Yale University ( email )

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New Haven, CT 06520-8268
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Andre Veiga

University of Oxford - Nuffield College ( email )

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Oxford, OX1 1NF
United Kingdom

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

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