Price Impact of Insurance

Andrea Di Giovan Paolo and Jose Higueras

Papers from arXiv.org

Abstract: This paper analyzes optimal insurance design when the insurer internalizes the effect of coverage on third-party service prices. A monopolistic insurer contracts with risk-averse agents who have sequential two-dimensional private information and preferences represented by Yaari's dual utility. Insurance contracts shape service demand and, through a market-clearing condition, determine equilibrium third-party prices. We characterize the structure of optimal contracts and show they take simple forms: either full coverage after a deductible is paid or limited coverage with an out-of-pocket maximum, closely mirroring real-world insurance plans. Technically, we formulate the problem as a sequential screening model and solve it using tools from optimal transport theory.

Date: 2025-03, Revised 2025-10
New Economics Papers: this item is included in nep-com, nep-hea and nep-rmg
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