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Policy in Competitive Insurance Markets: Incentivizing Risk Sharing and Cost Efficiency

By Ross Green

In the setting of a population with heterogeneous risk of illness, informational asymmetries in a competitive health insurance market can cause the gains from risk sharing to fall short of social optimality in equilibrium. Traditional policies meant to address the under-provision of insurance, like mandating open enrollment or community-rated premiums, can be prohibitively costly or impossible to implement. I consider three policy regimes in the context of a competitive insurance industry in which firms maximize profits by exerting effort to monitor the provision of health care. When multiple risk types are present in the population, I find that a subsidy rule based on the marginal costs of insuring high risks can induce a Pareto-improvement to risk sharing gains, at a cost to the efficiency of health care provision. The novelty of the subsidy rule lies in the way it incentives pooling equilibria.

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Advisor: Curtis Taylor | JEL Codes: I0, I13, I18 | Tagged: Health Care Efficiency, Insurance Contracts, Private Information

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