Multidimensional Screening and Menu Design in Health Insurance Markets
We 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. We 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.
We are grateful to Zack Cooper, Stuart Craig, Michael Dickstein, Eilidh Geddes, Ben Handel, Kate Ho, Amanda Kowalski, Tim Layton, Neale Mahoney, Alessandro Pavan, Mike Powell, Mark Shepard, Ashley Swanson, and seminar participants at Northwestern, the Utah Winter Business Economics Conference, Stanford, UCLA, Paris School of Economics, Michigan State, and University of Nevada-Reno for their helpful comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.