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Estimating Welfare in Insurance Markets Using Variation in Prices

Author

Listed:
  • Mark Cullen

    (Stanford University)

  • Liran Einav

    (Department of Economics, Stanford Univeristy)

  • Amy Finkelstein

    (Massachusetts Institute of Technology
    National Bureau of Economic Research)

Abstract

We provide an illustration of how standard consumer and producer theory can be used to quantify the welfare loss associated with inefficient pricing in insurance markets with selection. We then show how this welfare loss can be estimated empirically using identifying variation in the price of insurance. Such variation, together with quantity data, allows us to estimate the demand for insurance. The same variation, together with cost data, allows us to estimate how insurer's costs vary as market participants endogenously respond to price. The slope of this estimated cost curve provides a direct test for both the existence and nature of selection, and the combination of demand and cost curves can be used to estimate welfare. We illustrate our approach by applying it to data on employer-provided health insurance from one speci?c company. We detect adverse selection but estimate that the quantitative welfare implications associated with inefficient pricing in our particular application are small, in both absolute and relative terms. Creation Date: 2009-08 Revision Date:

Suggested Citation

  • Mark Cullen & Liran Einav & Amy Finkelstein, "undated". "Estimating Welfare in Insurance Markets Using Variation in Prices," Discussion Papers 08-046, Stanford Institute for Economic Policy Research.
    • Handle: RePEc:sip:dpaper:08-046
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    More about this item

    Keywords

    Asymmetric information; adverse selection; health insurance; efficiency cost;
    All these keywords.

    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
    • I1 - Health, Education, and Welfare - - Health

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