Regulation Design in Insurance Markets

Abstract

Regulators often impose rules that constrain the behavior of market participants. We study optimal regulation design in an insurance market. A regulator restricts the set of contracts a firm is allowed to offer. The firm offers a permitted menu to each agent, and the agent chooses a contract from the menu. The regulator seeks to maximize agent welfare. We show that under a risk-ordering condition, the regulator can implement her first-best allocation - all agents obtain full insurance at a constant price - using a collection of two-option menus. When the regulator has more limited enforcement power, we show that insurance mandates may harm welfare.