Imperfect Competition in Selection Markets

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Authors Neale Mahoney, E. Glen Weyl
Journal/Conference Name Review of Economics and Statistics
Paper Category
Paper Abstract Policies to correct market power and selection can be misguided when these forces coexist. We build a model of symmetric imperfect competition in selection markets that parameterizes the degree of market power and selection. We use graphical price-theoretic reasoning to characterize the interaction between these forces. Using a calibrated model of health insurance, we show that the risk adjustment commonly used to offset adverse selection can reduce coverage and social surplus. Conversely, in a calibrated model of subprime auto lending, realistic levels of competition can generate an oversupply of credit, implying that greater market power is desirable.
Date of publication 2014
Code Programming Language MATLAB

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