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How individuals choose health insurance: An experimental analysis

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  • Schram, Arthur
  • Sonnemans, Joep

Abstract

An individual choosing a health insurance policy faces a complex decision environment where a large set of alternatives differ on a variety of dimensions. There is uncertainty and the choice is repeated at least once a year. We study decisions and decision strategies in a laboratory experiment where we create a controlled environment that closely mirrors this setting. We use an electronic information board that allows to carefully monitor the individual's decision strategy. The number of alternatives, switching costs, and the speed at which health deteriorates are varied across treatments. We find that most subjects' search is based more on attributes than on policies. Moreover, we find that an increase in the number of alternatives increases decision-making time; makes subjects consider a lower fraction of the available information; makes it more likely that subjects will switch; and decreases the quality of their decisions. The introduction of positive costs of switching makes people switch less often but improves the quality of their decisions. Finally, if health deteriorates only gradually, individuals tend to stick to their current policy too long.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 55 (2011)
Issue (Month): 6 (August)
Pages: 799-819

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Handle: RePEc:eee:eecrev:v:55:y:2011:i:6:p:799-819

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Web page: http://www.elsevier.com/locate/eer

Related research

Keywords: Health insurance Laboratory experiments Decision making under uncertainty;

References

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  1. Gur Huberman & Wei Jiang, 2006. "Offering versus Choice in 401(k) Plans: Equity Exposure and Number of Funds," Journal of Finance, American Finance Association, vol. 61(2), pages 763-801, 04.
  2. Ariel Rubinstein, 2006. "Instinctive and Cognitive Reasoning: A Study of Response Times," Discussion Papers 1424, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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  4. Jason T. Abaluck & Jonathan Gruber, 2009. "Choice Inconsistencies Among the Elderly: Evidence from Plan Choice in the Medicare Part D Program," NBER Working Papers 14759, National Bureau of Economic Research, Inc.
  5. Arthur Schram, 2005. "Artificiality: The tension between internal and external validity in economic experiments," Journal of Economic Methodology, Taylor & Francis Journals, vol. 12(2), pages 225-237.
  6. Florian Heiss & Daniel McFadden & Joachim Winter, 2010. "Mind the Gap! Consumer Perceptions and Choices of Medicare Part D Prescription Drug Plans," NBER Chapters, in: Research Findings in the Economics of Aging, pages 413-481 National Bureau of Economic Research, Inc.
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  13. Schut, Frederik T. & Hassink, Wolter H. J., 2002. "Managed competition and consumer price sensitivity in social health insurance," Journal of Health Economics, Elsevier, vol. 21(6), pages 1009-1029, November.
  14. Smith, Vernon L, 1976. "Experimental Economics: Induced Value Theory," American Economic Review, American Economic Association, vol. 66(2), pages 274-79, May.
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  16. Samuelson, William & Zeckhauser, Richard, 1988. " Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 7-59, March.
  17. Jan Kerssens & Peter Groenewegen, 2005. "Consumer preferences in social health insurance," The European Journal of Health Economics, Springer, vol. 6(1), pages 8-15, March.
  18. Johnson, Eric J. & Camerer, Colin & Sen, Sankar & Rymon, Talia, 2002. "Detecting Failures of Backward Induction: Monitoring Information Search in Sequential Bargaining," Journal of Economic Theory, Elsevier, vol. 104(1), pages 16-47, May.
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Citations

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Cited by:
  1. Tibor Besedes & Cary Deck & Sudipta Sarangi & Mikhael Shor, 2012. "Designing a Sequential Choice Architecture to Reduce Choice Overload," Working papers 2012-24, University of Connecticut, Department of Economics.
  2. Hendrik Schmitz & Nicolas R. Ziebarth, 2011. "In Absolute or Relative Terms?: How Framing Prices Affects the Consumer Price Sensitivity of Health Plan Choice," SOEPpapers on Multidisciplinary Panel Data Research 423, DIW Berlin, The German Socio-Economic Panel (SOEP).
  3. Filippin, A. & Crosetto, P., 2014. "A reconsideration of gender differences in risk attitudes," Working Papers 2014-01, Grenoble Applied Economics Laboratory (GAEL).
  4. Hendrik Schmitz & Nicolas R. Ziebarth, 2011. "In Absolute or Relative Terms? How Framing Prices Affects the Consumer Price Sensitivity of," Ruhr Economic Papers 0304, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  5. Neil J. Buckley & Katherine Cuff & Jeremiah Hurley & Logan McLeod & Stuart Mestelman & David Cameron, 2012. "An Experimental Investigation of Mixed Systems of Public and Private Health Care Finance," Department of Economics Working Papers 2012-02, McMaster University.
  6. Godager, Geir & Wiesen, Daniel, 2011. "Profit or Patients' Health Benefit? Exploring the Heterogeneity in Physician Altruism," HERO On line Working Paper Series 2011:7, Oslo University, Health Economics Research Programme.
  7. Besedeš, Tibor & Deck, Cary & Sarangi, Sudipta & Shor, Mikhael, 2012. "Decision-making strategies and performance among seniors," Journal of Economic Behavior & Organization, Elsevier, vol. 81(2), pages 524-533.
  8. Robert L. Clark & Jennifer A. Maki & Melinda Sandler Morrill, 2013. "Can Simple Informational Nudges Increase Employee Participation in a 401(k) Plan?," NBER Working Papers 19591, National Bureau of Economic Research, Inc.
  9. Fels, Markus, 2013. "Limited Attention and the Demand for Health Insurance," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 80485, Verein für Socialpolitik / German Economic Association.
  10. Jan Brosse & Mathias Kifmann, 2013. "Competition in Health Insurance and Premium Regulation," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, vol. 11(1), pages 21-26, 04.

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