Department or Program
Primary Wellesley Thesis Advisor
Casey G. Rothschild
This paper investigates an insurance market with adverse selection, moral hazard and across-contract endogeneity, under monopoly and perfect competition. We characterize the equilibrium in a market without endogeneity and study how the introduction of across-contract endogeneity into the model distorts the optimal contracts. The across-contract endogeneity can be viewed as a second source of endogeneity, in addition to moral hazard, that further reduces insurance coverage if the insurer considers its implication when choosing contracts. We show that a monopolist internalizes the externality exerted by the contracts and offers contracts with less coverage, which induce a lower level of average risk. Competitive insurers fail to account for the interdependence of risks and do not adjust accordingly. They offer excessive insurance, which leads to a higher level of average risk and creates inefficiency. Our analysis suggests that there is a trade-off between monopoly and perfect competition.