In both panels a and b, we assume that there is a fixed subsidy equal to $250 and has a cost advantage over . Further, 60% of the population is low-income and 40% of the population is high-income, so WTP curves are weighted sums of both types. Panel a shows welfare losses in this setting under no mandate and , relative to efficient sorting. Efficient cutoffs are indicated with a * while equilibrium outcomes are denoted with an superscript. Panel b shows welfare changes under a risk-adjustment policy where , relative to the baseline risk-adjustment policy where . Panel c shows social welfare outcomes (darker higher welfare) from the model simulations under different parameters for the strength of risk adjustment (, -axis) and for the size of the uninsurance mandate penalty ($ per month, -axis). The optimum for one policy depends on the other: with weak risk adjustment, a weaker mandate is optimal, while with strong risk adjustment, a strong mandate is optimal.
