Regulation Design in Insurance Markets

41 Pages Posted: 17 Dec 2019 Last revised: 1 Jul 2020

See all articles by Dhruva Bhaskar

Dhruva Bhaskar

Queen Mary University of London

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 players interact. We adopt this approach to study regulation in insurance markets. A regulator restricts the menus of contracts a firm is allowed to offer, the firm offers a permitted menu to each agent, and agents choose contracts from their menus. Under a risk-ordering condition, the regulator can implement her first-best allocation using a collection of two-option menus. Several extensions explore the robustness of this result, illustrating the broad 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)

Queen Mary University of London ( email )

Mile End Rd
Mile End Road
London, London E1 4NS
United Kingdom

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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