2025/03/03 by Andrea Di Giovan Paolo, Paolo, Andrea Di Giovan, Jose Higueras +1
Economics, Econometrics and Finance · #Insurance and Financial Risk Management
paper · pdf · doi:10.48550/arxiv.2503.01780
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.