Working Paper: NBER ID: w9299
Authors: Mark V. Pauly; Bradley Herring; David Song
Abstract: This paper explores the level and dispersion of premiums paid for individual health insurance by comparing asking price' data posted on an electronic insurance exchange with survey data on premiums actually paid in the period just before the advent of electronic exchanges. The primary theoretical question is whether the pattern of differences between asking prices and transactions prices can be explained using a simple search theory. We hypothesize, following suggestions of Stigler and Rothschild, that higher risks who expect to pay higher premiums for a given policy will engage in more intensive search than lower risks, given the same distribution of asking prices. As a result, for a given distribution of asking prices, the dispersion of premiums actually paid (transactions prices) will be smaller for higher risks. Therefore, the introduction of an electronic exchange should have a larger potential influence on the dispersion and level of premiums paid for lower risks than for higher risks. We find evidence consistent with each of these hypotheses.
Keywords: health insurance; search theory; internet exchanges
JEL Codes: D83; G22; I10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher-risk individuals (I12) | search intensity (D83) |
| search intensity (D83) | dispersion of transaction prices (P22) |
| introduction of electronic exchanges (G10) | dispersion of transaction prices for lower-risk individuals (G19) |
| introduction of electronic exchanges (G10) | level of premiums paid by lower-risk individuals (G52) |
| higher-risk individuals (I12) | lower dispersion of transaction prices (D39) |