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Estimating Welfare in Insurance Markets Using Variation in Prices

Author

Listed:
  • Mark Cullen

    (Stanford University)

  • Liran Einav

    () (Stanford University)

  • Amy Finkelstein

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

Abstract

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.

Suggested Citation

  • Mark Cullen & Liran Einav & Amy Finkelstein, 2008. "Estimating Welfare in Insurance Markets Using Variation in Prices," Discussion Papers 08-006, Stanford Institute for Economic Policy Research.
  • Handle: RePEc:sip:dpaper:08-006
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    References listed on IDEAS

    as
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    Cited by:

    1. Liran Einav & Amy Finkelstein & Jonathan Levin, 2010. "Beyond Testing: Empirical Models of Insurance Markets," Annual Review of Economics, Annual Reviews, vol. 2(1), pages 311-336, September.
    2. Raj Chetty, 2009. "Sufficient Statistics for Welfare Analysis: A Bridge Between Structural and Reduced-Form Methods," Annual Review of Economics, Annual Reviews, vol. 1(1), pages 451-488, May.
    3. Amy Finkelstein, 2011. "Comment on "The Demand for Medicare Part D Prescription Drug Coverage: Evidence from Four Waves of the Retirement Perspectives Survey"," NBER Chapters,in: Explorations in the Economics of Aging, pages 182-185 National Bureau of Economic Research, Inc.
    4. Raj Chetty & Emmanuel Saez, 2010. "Optimal Taxation and Social Insurance with Endogenous Private Insurance," NBER Chapters,in: Income Taxation, Trans-Atlantic Public Economics Seminar (TAPES), pages 85-114 National Bureau of Economic Research, Inc.
    5. Rahkovsky, Ilya, 2010. "Exclusive contracts in health insurance," MPRA Paper 27473, University Library of Munich, Germany.

    More about this item

    Keywords

    asymmetric information; adverse selection; health insurance; effciency cost;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D60 - Microeconomics - - Welfare Economics - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets

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