This paper shows that selection incentives in downstream markets distort upstream prices. It is possible for inputs to be priced above the value that the good has for final consumers. We apply this framework to pharmaceutical companies selling drugs to a health insurance market with adverse...

We study optimal risk adjustment in imperfectly competitive health insurance markets when high-risk consumers are less likely to switch insurer than low-risk consumers. First, we find that insurers still have an incentive to select even if risk adjustment perfectly corrects for cost differences...