Managing adverse selection: underinsurance versus underenrollment

Evan Saltzman

RAND Journal of Economics, 2021, vol. 52, issue 2, 359-381

Abstract: Adverse selection in insurance markets may lead some consumers to underinsure or too few consumers to purchase insurance relative to the socially optimal level. I study whether common government policy interventions can mitigate both underinsurance and underenrollment due to adverse selection. I establish conditions under which there exists a tradeoff in addressing underinsurance and underenrollment. I then estimate a model of the California ACA insurance exchange using consumer‐level data to quantify the welfare impact of risk adjustment and the individual mandate. I find (1) risk adjustment reduces underinsurance, but reduces enrollment and (2) the mandate increases enrollment, but increases underinsurance.

Date: 2021
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