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Estimating Welfare in Insurance Markets Using Variation in Prices

  • Liran Einav
  • Amy Finkelstein
  • Mark R. Cullen

We show how standard consumer and producer theory can be used to estimate welfare in insurance markets with selection. The key observation is that the same price variation needed to identify the demand curve also identifies how costs vary as market participants endogenously respond to price. With estimates of both the demand and cost curves, welfare analysis is straightforward. We illustrate our approach by applying it to the employee health insurance choices at Alcoa, Inc. We detect adverse selection in this setting but estimate that its quantitative welfare implications are small, and not obviously remediable by standard public policy tools.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14414.

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Date of creation: Oct 2008
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Publication status: published as The Quarterly Journal of Economics (2010) 125 (3): 877-921. doi: 10.1162/qjec.2010.125.3.877
Handle: RePEc:nbr:nberwo:14414
Note: AG HC IO PE
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