Working Paper: NBER ID: w26994
Authors: Howard Kunreuther; Mark Pauly
Abstract: Do consumers show a strong bias toward low deductible insurance plans, as many field studies imply? This paper reports on a controlled experiment intended to see whether subjects have a predisposition toward such plans and whether that preference is consistent when their default plan and premiums are changed. Subjects were presented with a scenario where they had to make a decision on whether to purchase a plan with a low deductible (LD) or high deductible (HD) when faced with an illness having a specified probability and cost. Participants had to choose between these plans in two rounds with the identical risk of an illness and specified premiums. If their default option was an LD plan in Round 1, then it was an HD plan in Round 2. The experiment did not show a strong bias toward low deductible health plans. Only slightly more than half of the respondents chose an LD plan even when it was optimal for them to do so. When faced with a default option that was switched in Round 2, 58% of the respondents chose the same plan as they did in Round 1, implying that some but not all subjects resisted the default option in their decision process. Subject choices were correlated with their responses to questions about risk aversion and a desire for peace of mind.
Keywords: insurance; deductibles; consumer behavior; default options; risk aversion
JEL Codes: C90; C91; D03; D12; D3; D81; G22; I11; I18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Default option (LD) (Y20) | Choice of LD plan (C52) |
| Change default option (LD to HD) (Y60) | Choice of HD plan (R21) |
| Choice of LD plan (C52) | Risk aversion (D81) |
| Choice of LD plan (C52) | Concern for peace of mind (I31) |