Working Paper: NBER ID: w31435
Authors: Michael Geruso; Timothy Layton; Adam Leive
Abstract: Existing research on selection in insurance markets focuses on how adverse selection distorts prices and misallocates products across people. This ignores the distributional consequences of who pays the higher prices. In this paper, we show that the distributional incidence depends on the correlations between income, expected costs, and insurance demand. We discuss the general implications for the design of subsidies and mandates when policymakers value both equity and efficiency. Then, in an empirical case study of a large employer, we show that the incidence of selection falls on higher-income employees, who are more likely to choose generous health insurance plans.
Keywords: Adverse Selection; Health Insurance; Income Correlation; Insurance Demand
JEL Codes: D31; D8; D82; H22; I13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| adverse selection (D82) | wealth transfers (H24) |
| adverse selection (D82) | price distortions (L11) |
| corrective subsidies (H23) | increase surplus for high-income employees (E25) |
| corrective subsidies (H23) | increase surplus for low-income employees (J31) |
| adverse selection (D82) | implicit wealth transfers from inframarginal consumers to higher-income consumers (H23) |
| income (E25) | insurance demand (G52) |
| higher-income consumers (D12) | choose generous health insurance plans (I13) |