Working Paper: NBER ID: w25652
Authors: Michael P. Keane; Jonathan D. Ketcham; Nicolai V. Kuminoff; Timothy Neal
Abstract: We propose new methods to model behavior and conduct welfare analysis in complex environments where some choices are unlikely to reveal preferences. We develop a mixture-of-experts model that incorporates heterogeneity in consumers’ preferences and in their choice processes. We also develop a method to decompose logit errors into latent preferences versus optimization errors. Applying these methods to Medicare beneficiaries’ prescription drug insurance choices suggests that: (1) average welfare losses from suboptimal choices are small, (2) beneficiaries with dementia and depression have larger losses, and (3) policies that simplify choice sets offer small average benefits, helping some people but harming others.
Keywords: Medicare Part D; behavioral welfare economics; consumer choice; decision utility; cognitive limitations
JEL Codes: C25; D9; I13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| consumer decision-making (D12) | welfare outcomes (I38) |
| cognitive impairments (D91) | quality of plan choices (L15) |
| policies simplifying choice sets (D10) | consumer welfare (D69) |
| cognitive impairments (D91) | consumer decision-making (D12) |
| policies simplifying choice sets (D10) | help some individuals (I19) |
| policies simplifying choice sets (D10) | harm others (I12) |