Collusion in a One-Period Insurance Market with Adverse Selection

Abstract

Abstract We show that collusive-seeming 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 insurance is compulsory and involves a minimum premium and minimum coverage; these are common features in many health systems. In this setup we show that there is a range of equilibria, from the zero profit one where 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.