Estimating Welfare In Insurance Markets Using Variation in Prices
Name
Estimating.pdf
Description
forthcoming paper
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425.31 KB
Format
Adobe PDF
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Author(s)
Finkelstein, Amy
Einav, Liran
Cullen, Mark R.
Alternative Title
ESTIMATING WELFARE IN INSURANCE MARKETS USING VARIATION IN PRICES
Date Issued
August 2010
Journal
Quarterly Journal of Economics
Publisher
MIT Press Journals
Citation
Einav, Liran, Finkelstein, Amy, and Cullen, Mark R. "Estimating Welfare In Insurance Markets Using Variation In Prices." The Quarterly Journal of Economics 125.3 (August 2010). ©2010 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
Version
Author's final manuscript
Abstract
We provide a graphical illustration of how standard consumer and producer theory can be used to quantify the welfare loss associated with inefficient pricing in insurance markets with selection. We then show how this welfare loss can be estimated empirically using identifying variation in the price of insurance. Such variation, together with quantity data, allows us to estimate the demand for insurance. The same variation, together with cost data, allows us to estimate how insurer s costs vary as market participants endogenously respond to price. The slope of this estimated cost curve provides a direct test for both the existence and nature of selection, and the combination of demand and cost curves can be used to estimate welfare. We illustrate our approach by applying it to data on employer-provided health insurance from one specific company. We detect adverse selection but estimate that the quantitative welfare implications associated with inefficient pricing in our particular application are small, in both absolute and relative terms.
MIT Department
Massachusetts Institute of Technology. Department of Economics
Terms of Use
Attribution-Noncommercial-Share Alike 3.0 Unported
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DOI of Published Version
http://dx.doi.org/10.1162/qjec.2010.125.3.877
https://doi.org/10.1162/qjec.2010.125.3.877
