Nonexclusivity, Linear Pricing, and Annuity Market Screening
Casey Rothschild ()
Journal of Risk & Insurance, 2015, vol. 82, issue 1, 1-32
I develop a graphical approach for studying two-type adverse-selection insurance markets with (1) compulsory contracting, (2) linear pricing, (3) nonexclusive contracting, and (4) multiple indemnity states. The UK compulsory annuity market is a natural application. Despite fully linear pricing and nonexclusivity, screening of different types into distinct contracts—using the pattern of insurance payments across distinct indemnity states rather than quantity restrictions—is possible. Efficient screening involves distorting both types’ contracts away from first best contracts, for example, via front-loaded annuities. These distortions are attributable to convexification constraints that I identify as the nonexclusive, linear-pricing analog of canonical incentive compatibility constraints.
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