Post by Sapphire Capital on Aug 20, 2008 20:26:51 GMT 4
Collusion in a One-Period Insurance Market with Adverse Selection
Alexander Alegría
affiliation not provided to SSRN
Carlos Manuel Willington
Universidad Alberto Hurtado - ILADES
July 1, 2008
Abstract:
We show how collusive outcomes may occur in equilibrium in a one-period competitive insurance market characterized by adverse selection. We build on the Inderst and Wambach (2001) model and assume that insurees must pay a minimum premium, which is a common feature in many health systems. In this setup we show that there is a range of equilibria, from the zero profit one in which low-risks implicitly subsidize high risks, to one where firms obtain profits with both types of consumers. Moreover, we show that rents only partially dissipate if we assume free entry.
Along these equilibria, high risks always obtain full insurance while the low risks coverage decreases as the firms' profits increase. Recently the Chilean antitrust authority accused the largest five private health insurers of collusion after they had reduced the coverage offered and, as a result, significantly raised their profits. Our model is consistent with this accusation.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1171862_code347249.pdf?abstractid=1171862&mirid=3
Alexander Alegría
affiliation not provided to SSRN
Carlos Manuel Willington
Universidad Alberto Hurtado - ILADES
July 1, 2008
Abstract:
We show how collusive outcomes may occur in equilibrium in a one-period competitive insurance market characterized by adverse selection. We build on the Inderst and Wambach (2001) model and assume that insurees must pay a minimum premium, which is a common feature in many health systems. In this setup we show that there is a range of equilibria, from the zero profit one in which low-risks implicitly subsidize high risks, to one where firms obtain profits with both types of consumers. Moreover, we show that rents only partially dissipate if we assume free entry.
Along these equilibria, high risks always obtain full insurance while the low risks coverage decreases as the firms' profits increase. Recently the Chilean antitrust authority accused the largest five private health insurers of collusion after they had reduced the coverage offered and, as a result, significantly raised their profits. Our model is consistent with this accusation.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1171862_code347249.pdf?abstractid=1171862&mirid=3