Abstract
Should insurance prices vary with age? I consider competitive markets for lemons where a signal (eg, age) partitions consumers (eg, young and old). I study the continuum of policies between full community rating (CR, equal prices) and zero CR (no restriction on prices). CR increases welfare if high-cost markets exhibit greater adverse selection. I show how cost lev- els and risk adjustment affect optimal CR. I extend the model to arbitrary signal structures, multi-product firms, behavioral consumers, imperfect competition and environments where CR restores collapsed markets. In a calibration to US health insurance, optimal CR increase welfare by $730/person-year.
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