Working Paper: NBER ID: w28057
Authors: Toshiaki Iizuka; Hitoshi Shigeoka
Abstract: This study tests whether demand responds symmetrically to price increases and decreases—a seemingly obvious proposition under conventional demand theory that has not been rigorously tested. Exploiting rapid expansion in municipal subsidies for child healthcare in a difference-in-differences framework, we find evidence against it: when coinsurance, our price measure, increases from 0% to 30%, the demand response is more than twice that to a price decrease from 30% to 0%, a result consistent with loss aversion. This result indicates that, while economists and policymakers pay little attention, the price change direction matters, and that welfare analysis should incorporate this direction.
Keywords: demand response; price changes; child healthcare; loss aversion; municipal subsidies
JEL Codes: I11; I13; I18; J13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| coinsurance increases from 0% to 30% (G52) | demand response (L97) |
| demand response (L97) | outpatient spending decreases by approximately USD 200 (H51) |
| demand response (L97) | outpatient spending increases by USD 89 (H51) |
| loss aversion parameter calculated as the ratio of outpatient spending changes (D11) | significant deviation from the null hypothesis of symmetry in demand response (C69) |
| price increases (E30) | stronger reaction in demand for child healthcare (I11) |
| medication drives most of the observed asymmetry (I14) | outpatient spending increases by only USD 57 for price decreases (H51) |
| medication drives most of the observed asymmetry (I14) | outpatient spending decreases by USD 102 for price increases (H51) |
| strategic behavior in terms of intertemporal substitution (D15) | adjust healthcare utilization patterns (I18) |
| price increases (E30) | more pronounced strategic behavior in terms of intertemporal substitution (D15) |