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Adverse selection and risk adjustment under imperfect competition

Author

Listed:
  • Normann Lorenz

Abstract

This paper analyzes the distortions of health insurers’ benefit packages due to adverse selection when there is imperfect competition. Within a discrete choice setting with two risk types, the following main results are derived: For intermediate levels of competition, the benefit packages of both risk types are distorted in the separating equilibrium. As the level of competition decreases, the distortion decreases for the low risk type, but increases for the high risk type; in addition, the number of insurers offering the benefit package for the low risk type increases. If the level of competition is low enough, a pooling equilibrium emerges, which generally differs from the Wilson-equilibrium. It is shown that these results have important implications for risk adjustment: For intermediate levels of competition, risk adjustment can be ineffective or even decrease welfare if it is not reasonably precise.

Suggested Citation

  • Normann Lorenz, 2013. "Adverse selection and risk adjustment under imperfect competition," Research Papers in Economics 2013-05, University of Trier, Department of Economics.
  • Handle: RePEc:trr:wpaper:201305
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    File URL: http://www.uni-trier.de/fileadmin/fb4/prof/VWL/EWF/Research_Papers/2013-05.pdf
    File Function: First version, 2013
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    References listed on IDEAS

    as
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    Cited by:

    1. Normann Lorenz, 2014. "The interaction of direct and indirect risk selection," Research Papers in Economics 2014-12, University of Trier, Department of Economics.
    2. Lorenz, Normann, 2015. "The interaction of direct and indirect risk selection," Journal of Health Economics, Elsevier, vol. 42(C), pages 81-89.
    3. Normann Lorenz, 2014. "Adverse selection and heterogeneity of demand responsiveness," Research Papers in Economics 2014-02, University of Trier, Department of Economics.

    More about this item

    Keywords

    Adverse selection; discrete choice; risk adjustment;

    JEL classification:

    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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