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Health Insurance on the Internet and the Economics of Search

  • Mark V. Pauly
  • Bradley Herring
  • David Song

This paper explores the level and dispersion of premiums paid for individual health insurance by comparing asking price' data posted on an electronic insurance exchange with survey data on premiums actually paid in the period just before the advent of electronic exchanges. The primary theoretical question is whether the pattern of differences between asking prices and transactions prices can be explained using a simple search theory. We hypothesize, following suggestions of Stigler and Rothschild, that higher risks who expect to pay higher premiums for a given policy will engage in more intensive search than lower risks, given the same distribution of asking prices. As a result, for a given distribution of asking prices, the dispersion of premiums actually paid (transactions prices) will be smaller for higher risks. Therefore, the introduction of an electronic exchange should have a larger potential influence on the dispersion and level of premiums paid for lower risks than for higher risks. We find evidence consistent with each of these hypotheses.

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File URL: http://www.nber.org/papers/w9299.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9299.

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Date of creation: Oct 2002
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Handle: RePEc:nbr:nberwo:9299
Note: HC
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  1. Brown, Jeffrey, 2000. "Does the Internet Make Markets More Competitive? Evidence from the Life Insurance Industry," Working Paper Series rwp00-007, Harvard University, John F. Kennedy School of Government.
  2. Alan T. Sorensen, 2000. "Equilibrium Price Dispersion in Retail Markets for Prescription Drugs," Journal of Political Economy, University of Chicago Press, vol. 108(4), pages 833-862, August.
  3. Mark V. Pauly & Bradley Herring & David Song, 2002. "Tax Credits, the Distribution of Subsidized Health Insurance Premiums, and the Uninsured," NBER Chapters, in: Frontiers in Health Policy Research, Volume 5, pages 103-122 National Bureau of Economic Research, Inc.
  4. Salop, Steven & Stiglitz, Joseph E, 1977. "Bargains and Ripoffs: A Model of Monopolistically Competitive Price Dispersion," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 493-510, October.
  5. Salop, S & Stiglitz, J E, 1982. "The Theory of Sales: A Simple Model of Equilibrium Price Dispersion with Identical Agents," American Economic Review, American Economic Association, vol. 72(5), pages 1121-30, December.
  6. Karen Clay & Ramayya Krishnan & Eric Wolff, 2001. "Prices and Price Dispersion on the Web: Evidence from the Online Book Industry," NBER Working Papers 8271, National Bureau of Economic Research, Inc.
  7. Rothschild, Michael, 1973. "Models of Market Organization with Imperfect Information: A Survey," Journal of Political Economy, University of Chicago Press, vol. 81(6), pages 1283-1308, Nov.-Dec..
  8. Fiona Scott Morton & Florian Zettelmeyer & Jorge Silva Risso, 2000. "Internet Car Retailing," NBER Working Papers 7961, National Bureau of Economic Research, Inc.
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