The Two Margin Problem in Insurance Markets
74 Pages Posted: 31 May 2019 Last revised: 16 Sep 2019
Date Written: May 3, 2019
Insurance markets often feature consumer sorting along both an extensive margin (whether to buy) and an intensive margin (which plan to buy). We present a new graphical theoretical framework that extends a workhorse model to incorporate both selection margins simultaneously. A key insight from our framework is that policies aimed at addressing one margin of selection often involve an economically meaningful trade-off on the other margin in terms of prices, enrollment, and welfare. Using data from Massachusetts, we illustrate these trade-offs in an empirical sufficient statistics approach that is tightly linked to the graphical framework we develop.
Keywords: adverse selection, risk adjustment, mandate, subsidy
JEL Classification: I1, I11, I13, I18
Suggested Citation: Suggested Citation