Working Paper: NBER ID: w24470
Authors: Nathaniel Hendren
Abstract: The willingness to pay for insurance captures the value of insurance against only the risk that remains when choices are observed. This paper develops tools to measure the ex-ante expected utility impact of insurance subsidies and mandates when choices are observed after some insurable information is revealed. The approach retains the transparency of using reduced-form willingness to pay and cost curves, but it adds one additional sufficient statistic: the difference in marginal utilities between insured and uninsured. I provide an approach to estimate this statistic that uses only reduced-form willingness to pay and cost curves, combined with either a measure of risk aversion. I compare the approach to structural approaches that require fully specifying the choice environment and information sets of individuals. I apply the approach using existing willingness to pay and cost curve estimates from the low-income health insurance exchange in Massachusetts. Ex-ante optimal insurance prices are roughly 30% lower than prices that maximize market surplus. While mandates would increase deadweight loss, the results suggest they would actually increase ex-ante expected utility.
Keywords: Insurance; Welfare; Subsidies; Mandates; Expected Utility
JEL Codes: H0; I11; I3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| difference in marginal utilities of income between insured and uninsured individuals (G52) | ex-ante expected utility (D81) |
| pricing strategies (D49) | welfare outcomes (I38) |
| mandates (D72) | deadweight loss (H21) |
| mandates (D72) | ex-ante expected utility (D81) |
| perceived value (D46) | policy acceptance (G52) |
| information available to individuals at the time of choice (D87) | welfare impacts of insurance policies (G52) |