Could a Website Really Have Doomed the Health Exchanges? Multiple Equilibria, Initial Conditions and the Construction of the Fine
Public attention has focused on how the launch of the national health exchanges could impact the types of risks who initially enroll and thereby affect future premiums and enrollment. We introduce simple dynamics into a standard model of insurance under adverse selection to show that such "initial conditions" can indeed matter. When firms are price-takers, the market can converge to a Pareto-inferior "bad" equilibrium if there are at least three equilibria, which we suggest has empirical support. Strategic pricing eliminates Pareto dominated equilibria but requires common knowledge of preference and risk distributions. Changing the fine on non-participants from a fixed amount to a fraction of equilibrium prices increases the range of initial conditions consistent with reaching the "good" equilibrium while reducing the "badness" of the bad equilibrium -- all without increasing the fine value in the good equilibrium. Allowing insurers to quickly change prices can encourage them to experiment with strategic pricing if market fundamentals are not perfectly known, increasing the chance of reaching the good equilibrium independently from initial conditions.
|Date of creation:||Feb 2014|
|Date of revision:|
|Note:||AG HE IO PE|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Nick Netzer & Florian Scheuer, 2014.
"A Game Theoretic Foundation Of Competitive Equilibria With Adverse Selection,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55, pages 399-422, 05.
- Nick Netzer & Florian Scheuer, 2012. "A Game Theoretic Foundation of Competitive Equilibria with Adverse Selection," NBER Working Papers 18471, National Bureau of Economic Research, Inc.
- Liran Einav & Amy Finkelstein, 2011.
"Selection in Insurance Markets: Theory and Emprirics in Pictures,"
10-016, Stanford Institute for Economic Policy Research.
- Liran Einav & Amy Finkelstein, 2011. "Selection in Insurance Markets: Theory and Empirics in Pictures," Journal of Economic Perspectives, American Economic Association, vol. 25(1), pages 115-38, Winter.
- Liran Einav & Amy Finkelstein, 2011. "Selection in Insurance Markets: Theory and Empirics in Pictures," NBER Working Papers 16723, National Bureau of Economic Research, Inc.
- Wilson, Charles, 1977. "A model of insurance markets with incomplete information," Journal of Economic Theory, Elsevier, vol. 16(2), pages 167-207, December.
- Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, December.
- Benjamin R. Handel & Igal Hendel & Michael D. Whinston, 2013. "Equilibria in Health Exchanges: Adverse Selection vs. Reclassification Risk," NBER Working Papers 19399, National Bureau of Economic Research, Inc.
- Nathaniel Hendren, 2014. "Unravelling vs Unravelling: A Memo on Competitive Equilibriums and Trade in Insurance Markets," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 39(2), pages 176-183, September.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:19835. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.