Price Impact of Insurance
Abstract
This paper analyzes optimal insurance design when the insurer internalizes the effect of coverage on third-party service prices. A monopolistic insurer contracts with risk-averse agents who have sequential two-dimensional private information and preferences represented by Yaari's dual utility. Insurance contracts shape service demand and, through a market-clearing condition, determine equilibrium third-party prices. We characterize the structure of optimal contracts and show they take simple forms: either full coverage after a deductible is paid or limited coverage with an out-of-pocket maximum, closely mirroring real-world insurance plans. Technically, we formulate the problem as a sequential screening model and solve it using tools from optimal transport theory.
Cite
@article{arxiv.2503.01780,
title = {Price Impact of Insurance},
author = {Andrea Di Giovan Paolo and Jose Higueras},
journal= {arXiv preprint arXiv:2503.01780},
year = {2025}
}