Competition leverage: how the demand side affects optimal risk adjustment

Michiel Bijlsma, Jan Boone and Gijsbert Zwart

RAND Journal of Economics, 2014, vol. 45, issue 4, 792-815

Abstract: type="main">

We study optimal risk adjustment in imperfectly competitive health insurance markets when high-risk consumers are less likely to switch insurer than low-risk consumers. Insurers then have an incentive to select even if risk adjustment perfectly corrects for cost differences. To achieve first best, risk adjustment should overcompensate insurers for serving high-risk agents. Second, we identify a trade-off between efficiency and consumer welfare. Reducing the difference in risk adjustment subsidies increases consumer welfare by leveraging competition from the elastic low-risk market to the less elastic high-risk market. Third, mandatory pooling can increase consumer surplus further, at the cost of efficiency.

Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

Downloads: (external link)
http://hdl.handle.net/10.1111/1756-2171.12071 (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Competition leverage: How the demand side affects optimal risk adjustment (2011)
Working Paper: Competition leverage: how the demand side affects optimal risk adjustment (2011)
Working Paper: Competition Leverage: How the Demand Side Affects Optimal Risk Adjustment (2011)
Working Paper: Competition Leverage: How the Demand Side Affects Optimal Risk Adjustment (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:randje:v:45:y:2014:i:4:p:792-815

Ordering information: This journal article can be ordered from
http://www.blackwell ... al.asp?ref=0741-6261

Access Statistics for this article

RAND Journal of Economics is currently edited by James Hosek

More articles in RAND Journal of Economics from RAND Corporation Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().