Could a Website Really Have Doomed the Health Exchanges? Multiple Equilibria, Initial Conditions and the Construction of the Fine

36 Pages Posted: 28 Jan 2014

See all articles by Florian Scheuer

Florian Scheuer

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Kent A. Smetters

University of Pennsylvania - Business & Public Policy Department; National Bureau of Economic Research (NBER)

Date Written: February 2014

Abstract

Public attention has focused on how the launch of the national health exchanges could impact the types of risks who initially enroll and thereby affect future premiums and enrollment. We introduce simple dynamics into a standard model of insurance under adverse selection to show that such "initial conditions" can indeed matter. When firms are price-takers, the market can converge to a Pareto-inferior "bad" equilibrium if there are at least three equilibria, which we suggest has empirical support. Strategic pricing eliminates Pareto dominated equilibria but requires common knowledge of preference and risk distributions. Changing the fine on non-participants from a fixed amount to a fraction of equilibrium prices increases the range of initial conditions consistent with reaching the "good" equilibrium while reducing the "badness" of the bad equilibrium -- all without increasing the fine value in the good equilibrium. Allowing insurers to quickly change prices can encourage them to experiment with strategic pricing if market fundamentals are not perfectly known, increasing the chance of reaching the good equilibrium independently from initial conditions.

Suggested Citation

Scheuer, Florian and Smetters, Kent, Could a Website Really Have Doomed the Health Exchanges? Multiple Equilibria, Initial Conditions and the Construction of the Fine (February 2014). NBER Working Paper No. w19835, Available at SSRN: https://ssrn.com/abstract=2386402

Florian Scheuer (Contact Author)

Stanford University - Department of Economics ( email )

Landau Economics Building
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Stanford, CA 94305-6072
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National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Kent Smetters

University of Pennsylvania - Business & Public Policy Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6372
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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