Optimal Contract Regulation in Selection Markets

We model competitive insurance markets with continuous cost-types. A regulator sets minimum and maximum coverage levels and a fee for nonbuyers. Equilibrium is unique if the type distribution is log-concave. Increasing the nonpurchase fee increases welfare if the density of types is decreasing. The optimal level of the minimum coverage is positive, is below full insurance, and induces some pooling at the minimum coverage contract. The optimal level of the maximum coverage is full insurance, even in an extension that allows for ex post moral hazard. (JEL D82, D86, G22, G28)