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Measuring Ex Ante Welfare in Insurance Markets
[Some Aspects of Optimal Unemployment Insurance]

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  • Nathaniel Hendren

Abstract

The willingness to pay for insurance captures the value of insurance against only the risk that remains when choices are observed. This article develops tools to measure the ex ante expected utility impact of insurance subsidies and mandates when choices are observed after some insurable information is revealed. The approach retains the transparency of using reduced-form willingness to pay and cost curves, but it adds one additional sufficient statistic: the percentage difference in marginal utilities between insured and uninsured. I provide an approach to estimate this additional statistic that uses only the reduced-form willingness to pay curve, combined with a measure of risk aversion. I compare the approach to structural approaches that require fully specifying the choice environment and information sets of individuals. I apply the approach using existing willingness to pay and cost curve estimates from the low-income health insurance exchange in Massachusetts. Ex ante optimal insurance prices are roughly 30% lower than prices that maximize observed market surplus. While mandates reduce market surplus, the results suggest they would actually increase ex ante expected utility.

Suggested Citation

  • Nathaniel Hendren, 2021. "Measuring Ex Ante Welfare in Insurance Markets [Some Aspects of Optimal Unemployment Insurance]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(3), pages 1193-1223.
    • Handle: RePEc:oup:restud:v:88:y:2021:i:3:p:1193-1223.
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    File URL: http://hdl.handle.net/10.1093/restud/rdaa015
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    References listed on IDEAS

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    Cited by:

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