Adverse Selection and the Market for Health Insurance in the U

Several studies have examined the market for employer-provided group health insurance in the United States. The theoretical side of the literature has struggled with the existence of equilibrium due to the adverse selection problem inherent in the sale of health insurance. The empirical side of the literature has had trouble estimating the price elasticity of demand for health insurance, in part, because many of the empirical papers are not based upon any of the theoretical work. The purpose of this paper is to present a screening model of the market for health insurance that will attempt to address both problems. The model will discuss the existence of equilibrium and lends itself more easily to empirical applications than previous models. Unlike Rothschild and Stiglitz (1976) or Wilson (1977), I can show that both a unique separating equilibrium and multiple pooling equilibria exist in my model under the assumption that a worker's health type is private information. JEL classification: D82; I00