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16:30 - 18:00 11 November 2014
Perfect Competition in Markets with Adverse Selection
Room 321 |
30 Gordon Street | London | WC1H 0AN | United Kingdom
Policy makers and economists consider adverse selection an important problem in many markets. Governments typically respond with complicated regulations, which include mandates, community rating, subsidies, risk adjustment, and regulation of contract characteristics.
This paper proposes a perfectly competitive model of adverse selection, as a first step to analyze these issues. Crucially for the applications, contract characteristics are determined endogenously, and equilibria always exist.
We apply the model to show that mandates can have unintended consequences, forcing more consumers to purchase insurance but potentially increasing adverse selection between different levels of coverage. We show that competitive markets are typically inefficient, and give a simple sufficient statistics formula for optimal regulation.
Department of Economics - Reception
020 7679 5888 | -
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