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Optimal Contract Regulation in Selection Markets

Author

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  • Yehuda John Levy
  • André Veiga

Abstract

We model competitive insurance markets with continuous cost-types. A regulator sets minimum and maximum coverage levels and a fee for nonbuyers. Equilibrium is unique if the type distribution is log-concave. Increasing the nonpurchase fee increases welfare if the density of types is decreasing. The optimal level of the minimum coverage is positive, below full insurance, and induces some pooling at the minimum coverage contract. The optimal level of the maximum coverage is full insurance, even in an extension that allows for ex post moral hazard.

Suggested Citation

  • Yehuda John Levy & André Veiga, 2025. "Optimal Contract Regulation in Selection Markets," American Economic Journal: Microeconomics, American Economic Association, vol. 17(2), pages 94-126, May.
    • Handle: RePEc:aea:aejmic:v:17:y:2025:i:2:p:94-126
    DOI: 10.1257/mic.20230164
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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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