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Multidimensional Screening and Menu Design in Health Insurance Markets (WP-22-42)

Hector Chade, Victoria Marone, Amanda Starc, and Jeroen Swinkels

The researchers study a general screening model that encompasses a health insurance market in which consumers have multiple dimensions of private information and a price-setting insurer (e.g., a monopolist or a social planner) offers vertically differentiated contracts. They combine theory and empirics to provide three novel results: (i) optimal menus satisfy intuitive conditions that generalize the literature on multidimensional screening and shed light on insurer incentives; (ii) the insurer's problem with an unlimited number of contracts is well-approximated with only a small set of contracts; and (iii) under an additional assumption, the problem becomes dramatically simpler and can be solved using familiar graphical analysis. Calibrated numerical simulations validate assumptions, quantify the differential incentives of a monopolist and a social planner, and evaluate common policy interventions in a monopoly market.

Hector Chade, Professor of Economics, Arizona State University

Victoria Marone, Assistant Professor of Economics, University of Texas at Austin

Amanda Starc, Associate Professor of Strategy and IPR Associate, Northwestern University

Jeroen Swinkels, Richard M. Paget Professor of Management Policy and Professor of Strategy, Northwestern University

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