Competition leverage

How the demand side affects optimal risk adjustment

M.J. Bijlsma, J. Boone, Gijsbert Zwart

Research output: Contribution to journalArticleScientificpeer-review

Abstract

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.
Original languageEnglish
Pages (from-to)792-815
JournalRAND Journal of Economics
Volume45
Issue number4
DOIs
Publication statusPublished - Oct 2014

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Risk adjustment
Leverage
Insurer
Market risk
Consumer welfare
Consumer risk
Insurance market
Trade-offs
Health insurance
Subsidies
Incentives
Consumer surplus
Pooling
Costs

Cite this

Bijlsma, M.J. ; Boone, J. ; Zwart, Gijsbert. / Competition leverage : How the demand side affects optimal risk adjustment. In: RAND Journal of Economics. 2014 ; Vol. 45, No. 4. pp. 792-815.
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Competition leverage : How the demand side affects optimal risk adjustment. / Bijlsma, M.J.; Boone, J.; Zwart, Gijsbert.

In: RAND Journal of Economics, Vol. 45, No. 4, 10.2014, p. 792-815.

Research output: Contribution to journalArticleScientificpeer-review

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