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Estimating Welfare in Insurance Markets Using Variation in Prices

  • Mark Cullen

    (Stanford University)

  • Liran Einav

    ()

    (Stanford University)

  • Amy Finkelstein

    (Massachusetts Institute of Technology and National Bureau of Economic Research)

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 straight forward. 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 Stanford Institute for Economic Policy Research in its series Discussion Papers with number 08-006.

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Date of creation: Oct 2008
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Handle: RePEc:sip:dpaper:08-006
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