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The Incidence of Adverse Selection: Theory and Evidence from Health Insurance Choices

Author

Listed:
  • Michael Geruso
  • Timothy Layton
  • Adam Leive

Abstract

Existing research on selection in insurance markets focuses on how adverse selection distorts prices and misallocates products across people. This ignores the distributional consequences of who pays the higher prices. In this paper, we show that the distributional incidence depends on the correlations between income, expected costs, and insurance demand. We discuss the general implications for the design of subsidies and mandates when policymakers value both equity and efficiency. Then, in an empirical case study of a large employer, we show that the incidence of selection falls on higher-income employees, who are more likely to choose generous health insurance plans.

Suggested Citation

  • Michael Geruso & Timothy Layton & Adam Leive, 2023. "The Incidence of Adverse Selection: Theory and Evidence from Health Insurance Choices," NBER Working Papers 31435, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31435
    Note: AG EH HC HE PE
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    More about this item

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private

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