Optimal Contract Regulation in Selection Markets

89 Pages Posted: 9 Feb 2022 Last revised: 5 Jul 2023

See all articles by Andre Veiga

Andre Veiga

Imperial College London

Yehuda Levy

Adam Smith Business School

Date Written: February 8, 2022

Abstract

We model competitive insurance markets with continuous cost-types. A regulator sets minimum and maximum coverage levels and a fee for non-buyers. Equilibrium is unique if the type distribution is log-concave. Increasing the maximum coverage increases welfare. Increasing the non-purchase fee increases welfare if the density of types is decreasing. In markets for lemons, the optimal mandated cover- age is below full insurance, unless “full insurance for all” is an equilibrium. Even in the presence of moral hazard, socially excessive levels of coverage are not traded in equilibrium, so restricting the maximal coverage (weakly) decreases welfare.

Keywords: Adverse Selection, Asymmetric Information, Insurance, Equilibrium Existence, Regulation

JEL Classification: C62, G22, I13, D82, L51

Suggested Citation

Veiga, Andre and Levy, Yehuda, Optimal Contract Regulation in Selection Markets (February 8, 2022). Available at SSRN: https://ssrn.com/abstract=4029945 or http://dx.doi.org/10.2139/ssrn.4029945

Andre Veiga (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Yehuda Levy

Adam Smith Business School ( email )

Glasgow, Scotland
United Kingdom

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