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The Two-Margin Problem in Insurance Markets

Author

Listed:
  • Michael Geruso

    (University of Texas at Austin and NBER)

  • Timothy J. Layton

    (Harvard University and NBER)

  • Grace McCormack

    (Harvard University)

  • Mark Shepard

    (Harvard University and NBER)

Abstract

Insurance markets often feature consumer sorting along both an extensive margin (whether to buy) and an intensive margin (which plan to buy). We present a new graphical theoretical framework that extends a workhorse model to incorporate both selection margins simultaneously. A key insight from our framework is that policies aimed at addressing one margin of selection often involve an economically meaningful trade-off on the other margin in terms of prices, enrollment, and welfare. Using data from Massachusetts, we illustrate these trade-offs in an empirical sufficient statistics approach that is tightly linked to the graphical framework we develop.

Suggested Citation

  • Michael Geruso & Timothy J. Layton & Grace McCormack & Mark Shepard, 2023. "The Two-Margin Problem in Insurance Markets," The Review of Economics and Statistics, MIT Press, vol. 105(2), pages 237-257, March.
    • Handle: RePEc:tpr:restat:v:105:y:2023:i:2:p:237-257
    DOI: 10.1162/rest_a_01070
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    Citations

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    Cited by:

    1. Florent Nkouaga & Jeffrey Czajkowski & Kelly Edmiston & Brenda Rourke, 2025. "Modeling Behavioral and Attitudinal Drivers of Life Insurance Selection and Premiums: Polynomial Approaches to Perceived Affordability in Term and Cash Value Products," JRFM, MDPI, vol. 18(9), pages 1-33, September.
    2. Yuyuan Che & Hongli Feng & David A. Hennessy, 2020. "Recency effects and participation at the extensive and intensive margins in the U.S. Federal Crop Insurance Program," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 45(1), pages 52-85, January.
    3. Richard C. Kleef & Mieke Reuser & Pieter J.A. Stam & Wynand P.M.M. Ven, 2024. "A framework for ex-ante evaluation of the potential effects of risk equalization and risk sharing in health insurance markets with regulated competition," Health Economics Review, Springer, vol. 14(1), pages 1-15, December.
    4. Richard Domurat & Isaac Menashe & Wesley Yin, 2019. "The Role of Behavioral Frictions in Health Insurance Marketplace Enrollment and Risk: Evidence from a Field Experiment," NBER Working Papers 26153, National Bureau of Economic Research, Inc.
    5. Yann Braouezec & John Cagnol, 2023. "Theoretical Foundations of Community Rating by a Private Monopolist Insurer: Framework, Regulation, and Numerical Analysis," Papers 2309.15269, arXiv.org, revised Dec 2023.
    6. Martin Gaynor & Kate Ho & Robert J. Town, 2015. "The Industrial Organization of Health-Care Markets," Journal of Economic Literature, American Economic Association, vol. 53(2), pages 235-284, June.
    7. Rory McGee, 2023. "Adverse selection among early adopters and unraveling innovation," IFS Working Papers W23/40, Institute for Fiscal Studies.
    8. Drake, Coleman & Anderson, David & Cai, Sih-Ting & Sacks, Daniel W., 2023. "Financial transaction costs reduce benefit take-up evidence from zero-premium health insurance plans in Colorado," Journal of Health Economics, Elsevier, vol. 89(C).
    9. Fleitas, Sebastian & Gowrisankaran, Gautam & Lo Sasso, Anthony, 2022. "Incumbent regulation and adverse selection: You can keep your health plan, but at what cost?," Journal of Public Economics, Elsevier, vol. 205(C).
    10. Roy McGee, 2023. "Adverse Selection Among Early Adopters and Unraveling Innovation," University of Western Ontario, Centre for Human Capital and Productivity (CHCP) Working Papers 2022302, University of Western Ontario, Centre for Human Capital and Productivity (CHCP).
    11. Chatterjee, Indradeb & Hao, MingJie & Tapadar, Pradip & Thomas, R. Guy, 2024. "Can price collars increase insurance loss coverage?," Insurance: Mathematics and Economics, Elsevier, vol. 116(C), pages 74-94.
    12. Timothy F. Harris & Aaron Yelowitz & Jeffery Talbert & Alison Davis, 2023. "Adverse selection in the group life insurance market," Economic Inquiry, Western Economic Association International, vol. 61(4), pages 911-941, October.
    13. Benjamin R. Handel & Jonathan T. Kolstad, 2021. "The Affordable Care Act After a Decade: Industrial Organization of the Insurance Exchanges," NBER Working Papers 29178, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health
    • I1 - Health, Education, and Welfare - - Health
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private

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