We study insurance markets in which privately informed consumers can purchase coverage from several insurers. Under adverse selection, multiple contracting severely restricts feasible trades. Indeed, only one budget-balanced allocation is implementable by an entry-proof tariff, and each layer of coverage must be fairly priced given the consumer types who purchase it. This allocation is the unique equilibrium outcome of a game in which cross-subsidies between contracts are prohibited. Equilibrium contracts exhibit quantity discounts and negative correlation between risk and coverage. Public intervention should target insurers’ strategic behavior, while consumers can be left free to choose their preferred amount of coverage.
Insurance Markets; Multiple Contracting; Adverse Selection;
- D43: Oligopoly and Other Forms of Market Imperfection
- D82: Asymmetric and Private Information • Mechanism Design
- D86: Economics of Contract: Theory
TSE Working Paper, n. 14-532, October 7, 2014, revised September 2016