Working Paper: NBER ID: w14330
Authors: Jeffrey Liebman; Richard Zeckhauser
Abstract: The behavioral revolution in economics has demonstrated that human beings often have difficulty making wise choices. The most widely chronicled difficulties arise for decisions made under conditions of uncertainty, those whose consequences unfold over significant amounts of time, and decisions made in complex environments. Unfortunately, these are precisely the elements involved when individuals choose a health insurance policy, or decide whether to consume health care services. In this paper, we argue that traditional economic models of insurance are woefully insufficient for analyzing the tradeoffs inherent when giving consumers responsibility for making health care choices. We show that behavioral economics provides a stronger normative justification for many features of our existing health care policy than do the models of traditional economics. We then demonstrate that policy analyses of the wide range of subsidies that permeate the health care system change substantially when viewed from the behavioral perspective. In closing, we discuss how recent policy trends can be fruitfully assessed using a behavioral lens.
Keywords: behavioral economics; health insurance; consumer decision-making; subsidies
JEL Codes: D80; H21; I11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Traditional economic models (E19) | Fail to capture complexities of consumer choices in health insurance (G52) |
| Behavioral economics (D91) | Provides stronger framework for understanding consumer behavior (D11) |
| Behavioral biases (D91) | Affect decision-making processes (D91) |
| Behavioral biases (D91) | Implications on effectiveness of health care subsidies and consumer choices (H51) |
| Presence of subsidies in health care (H51) | Alters consumer behavior (D19) |
| Subsidies (H20) | Overconsumption or underconsumption based on perceptions (E21) |
| Status quo bias (D81) | Hinders optimal choices in health care coverage (I13) |
| Understanding behavioral aspects (D91) | Crucial for effective health policy design (I18) |
| Current health insurance system (I13) | Does not reflect realities of consumer behavior (D19) |
| Current health insurance system (I13) | Leads to inefficiencies and misaligned incentives in health care consumption (H51) |