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Price Impact of Insurance

Author

Listed:
  • Andrea Di Giovan Paolo
  • Jose Higueras

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.

Suggested Citation

  • Andrea Di Giovan Paolo & Jose Higueras, 2025. "Price Impact of Insurance," Papers 2503.01780, arXiv.org, revised Oct 2025.
    • Handle: RePEc:arx:papers:2503.01780
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    File URL: http://arxiv.org/pdf/2503.01780
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    References listed on IDEAS

    as
    1. Jean Tirole, 2012. "Overcoming Adverse Selection: How Public Intervention Can Restore Market Functioning," Post-Print hal-04886042, HAL.
    2. Jean Tirole, 2012. "Overcoming Adverse Selection: How Public Intervention Can Restore Market Functioning," American Economic Review, American Economic Association, vol. 102(1), pages 29-59, February.
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