Managing adverse selection: underinsurance versus underenrollment

Adverse selection in insurance markets may lead some consumers to underinsure or too few consumers to purchase insurance relative to the socially optimal level. I study whether common government policy interventions can mitigate both underinsurance and underenrollment due to adverse selection. I establish conditions under which there exists a tradeoff in addressing underinsurance and underenrollment. I then estimate a model of the California ACA insurance exchange using consumer‐level data to quantify the welfare impact of risk adjustment and the individual mandate. I find (1) risk adjustment reduces underinsurance, but reduces enrollment and (2) the mandate increases enrollment, but increases underinsurance.