Working Paper: NBER ID: w14414
Authors: Liran Einav; Amy Finkelstein; Mark R. Cullen
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 straightforward. 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.
Keywords: Welfare analysis; Adverse selection; Insurance markets; Price variation
JEL Codes: C13; C51; D14; D60; D82; I11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| price variation (D46) | demand curve (D11) |
| price variation (D46) | cost curves (D24) |
| adverse selection exists (D82) | increasing marginal cost (D40) |
| higher prices (D49) | select individuals with higher expected costs (D61) |
| adverse selection (D82) | efficiency cost (D61) |
| adverse selection (D82) | equilibrium price (D41) |
| public funds for efficient pricing (H49) | welfare gain (D69) |
| adverse selection (D82) | market share of high coverage (G52) |