NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Imperfect Competition in Selection Markets

Neale Mahoney, E. Glen Weyl

NBER Working Paper No. 20411
Issued in August 2014
NBER Program(s):Aging, Health Care, Health Economics, Industrial Organization, Public Economics

Standard policies to correct market power and selection can be misguided when these two forces co-exist. Using a calibrated model of employer-sponsored health insurance, we show that the risk adjustment commonly used by employers to offset adverse selection often reduces the amount of high-quality coverage and thus social surplus. Conversely, in a model of subprime auto lending calibrated to Einav, Jenkins and Levin (2012), realistic levels of competition among lenders generate a significant oversupply of credit, implying greater market power is desirable. We build a model of symmetric imperfect competition in selection markets that parameterizes the degree of both market power and selection and use graphical price-theoretic reasoning to provide a general analysis of the interaction between selection and imperfect competition. We use the same logic to show that in selection markets four principles of the United States Horizontal Merger Guidelines are often reversed.

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Document Object Identifier (DOI): 10.3386/w20411

Published: Neale Mahoney & E. Glen Weyl, 2017. "Imperfect Competition in Selection Markets," The Review of Economics and Statistics, vol 99(4), pages 637-651.

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