Regulation Design in Insurance Markets

36 Pages Posted: 17 Dec 2019 Last revised: 4 Mar 2021

See all articles by Dhruva Bhaskar

Dhruva Bhaskar

Baruch College, CUNY

Andrew McClellan

University of Chicago - Booth School of Business - Economics

Evan Sadler

Columbia University, Graduate School of Arts and Sciences, Department of Economics

Date Written: December 13, 2019

Abstract

Regulators often impose rules that constrain the behavior of market participants. We propose a new framework in which to study optimal regulation, representing the policy choice as a delegation problem overlaying a mechanism design problem: a regulator chooses a set of permitted mechanisms to influence how a mechanism designer and other agents interact. We adopt this approach to study regulation in insurance markets. A regulator restricts the menus of contracts an informed firm is allowed to offer, the firm offers a permitted menu to each consumer, and consumers choose contracts from offered menus. Under an ordering on consumer types and firm information, the regulator can fully leverage the firm's information by forcing the firm to offer specified additional options on each menu. Several extensions illustrate the applicability of our framework.

Keywords: Regulation design, insurance, deviation contract

JEL Classification: D82, D47

Suggested Citation

Bhaskar, Dhruva and McClellan, Andrew and Sadler, Evan, Regulation Design in Insurance Markets (December 13, 2019). Available at SSRN: https://ssrn.com/abstract=3501883 or http://dx.doi.org/10.2139/ssrn.3501883

Dhruva Bhaskar (Contact Author)

Baruch College, CUNY ( email )

Zicklin School of Business, Baruch College, CUNY
55 Lexington Avenue
New York, NY 10010
United States

Andrew McClellan

University of Chicago - Booth School of Business - Economics ( email )

Graduate School of Business
1101 East 58th Street
Chicago, IL 60637
United States

Evan Sadler

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

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