The Two Margin Problem in Insurance Markets

74 Pages Posted: 31 May 2019 Last revised: 16 Sep 2019

See all articles by Michael Geruso

Michael Geruso

University of Texas at Austin; National Bureau of Economic Research (NBER)

Timothy J. Layton

Harvard Medical School - Department of Health Care Policy; National Bureau of Economic Research

Grace McCormack

Harvard University

Mark Shepard

Harvard University - Harvard Kennedy School (HKS)

Multiple version iconThere are 2 versions of this paper

Date Written: May 3, 2019

Abstract

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

Geruso, Michael and Layton, Timothy J. and McCormack, Grace and Shepard, Mark, The Two Margin Problem in Insurance Markets (May 3, 2019). Available at SSRN: https://ssrn.com/abstract=3385492 or http://dx.doi.org/10.2139/ssrn.3385492

Michael Geruso (Contact Author)

University of Texas at Austin ( email )

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Timothy J. Layton

Harvard Medical School - Department of Health Care Policy ( email )

180 Longwood Ave
Boston, MA 02115
United States

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Grace McCormack

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

Mark Shepard

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

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