Advanced Search
MyIDEAS: Login to save this paper or follow this series

Estimating Welfare in Insurance Markets Using Variation in Prices

Contents:

Author Info

  • Mark Cullen

    (Stanford University)

  • Liran Einav

    ()
    (Department of Economics, Stanford Univeristy)

  • Amy Finkelstein

    (Massachusetts Institute of Technology
    National Bureau of Economic Research)

Registered author(s):

    Abstract

    We provide an illustration of how standard consumer and producer theory can be used to quantify the welfare loss associated with inefficient pricing in insurance markets with selection. We then show how this welfare loss can be estimated empirically using identifying variation in the price of insurance. Such variation, together with quantity data, allows us to estimate the demand for insurance. The same variation, together with cost data, allows us to estimate how insurer's costs vary as market participants endogenously respond to price. The slope of this estimated cost curve provides a direct test for both the existence and nature of selection, and the combination of demand and cost curves can be used to estimate welfare. We illustrate our approach by applying it to data on employer-provided health insurance from one speci?c company. We detect adverse selection but estimate that the quantitative welfare implications associated with inefficient pricing in our particular application are small, in both absolute and relative terms.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www-siepr.stanford.edu/repec/sip/08-046.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by Stanford Institute for Economic Policy Research in its series Discussion Papers with number 08-046.

    as in new window
    Length:
    Date of creation: Aug 2009
    Date of revision:
    Handle: RePEc:sip:dpaper:08-046

    Contact details of provider:
    Postal: 366 Galvez Street, Stanford, California 94305-6015
    Phone: (650) 725-1874
    Fax: (650) 723-8611
    Web page: http://siepr.stanford.edu
    More information through EDIRC

    Related research

    Keywords: Asymmetric information; adverse selection; health insurance; efficiency cost;

    Find related papers by JEL classification:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Raj Chetty & Emmanuel Saez, 2010. "Optimal Taxation and Social Insurance with Endogenous Private Insurance," American Economic Journal: Economic Policy, American Economic Association, vol. 2(2), pages 85-114, May.
    2. Jaap H. Abbring & Pierre-André Chiappori & Jean Pinquet, 2003. "Moral Hazard and Dynamic Insurance Data," Journal of the European Economic Association, MIT Press, vol. 1(4), pages 767-820, 06.
    3. Dean Karlan & Jonathan Zinman, 2005. "Observing unobservables: identifying information asymmetries with a consumer-credit field experiment," Proceedings 961, Federal Reserve Bank of Chicago.
    4. Liran Einav & Amy Finkelstein & Jonathan Levin, 2009. "Beyond Testing: Empirical Models of Insurance Markets," NBER Working Papers 15241, National Bureau of Economic Research, Inc.
    5. Amy Finkelstein & James Poterba, 2004. "Adverse Selection in Insurance Markets: Policyholder Evidence from the U.K. Annuity Market," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 183-208, February.
    6. Pierre-Andre Chiappori & Bernard Salanie, 2000. "Testing for Asymmetric Information in Insurance Markets," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 56-78, February.
    7. David A. Wise, 1998. "Introduction to "Inquiries in the Economics of Aging"," NBER Chapters, in: Inquiries in the Economics of Aging, pages 1-15 National Bureau of Economic Research, Inc.
    8. William Adams & Liran Einav & Jonathan Levin, 2007. "Liquidity Constraints and Imperfect Information in Subprime Lending," NBER Working Papers 13067, National Bureau of Economic Research, Inc.
    9. Lustig, Joshua, 2008. "The Welfare Effects of Adverse Selection in Privatized Medicare," Department of Economics, Working Paper Series qt7n09099j, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    10. de Meza, David & Webb, David C, 2001. "Advantageous Selection in Insurance Markets," RAND Journal of Economics, The RAND Corporation, vol. 32(2), pages 249-62, Summer.
    11. Thomas Buchmueller & John DiNardo, 1999. "Did Community Rating Induce an Adverse Selection Death Spiral? Evidencefrom New York, Pennsylvania and Connecticut," NBER Working Papers 6872, National Bureau of Economic Research, Inc.
    12. Gruber, Jonathan, 1994. "The Incidence of Mandated Maternity Benefits," American Economic Review, American Economic Association, vol. 84(3), pages 622-41, June.
    13. Stiglitz, Joseph E, 1987. "The Causes and Consequences of the Dependence of Quality on Price," Journal of Economic Literature, American Economic Association, vol. 25(1), pages 1-48, March.
    14. David M. Cutler & Sarah Reber, 1996. "Paying for Health Insurance: The Tradeoff between Competition and Adverse Selection," NBER Working Papers 5796, National Bureau of Economic Research, Inc.
    15. M. Kate Bundorf & Kosali I. Simon, 2006. "The Effects of Rate Regulation on Demand for Supplemental Health Insurance," American Economic Review, American Economic Association, vol. 96(2), pages 67-71, May.
    16. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
    17. Levon Barseghyan & Jeffrey Prince & Joshua C. Teitelbaum, 2011. "Are Risk Preferences Stable across Contexts? Evidence from Insurance Data," American Economic Review, American Economic Association, vol. 101(2), pages 591-631, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:sip:dpaper:08-046. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anne Shor).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.