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Measuring Ex-Ante Welfare in Insurance Markets

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  • Nathaniel Hendren

Abstract

The willingness to pay for insurance captures the value of insurance against only the risk that remains when choices are observed. This paper develops tools to measure the ex-ante expected utility impact of insurance subsidies and mandates when choices are observed after some insurable information is revealed. The approach retains the transparency of using reduced-form willingness to pay and cost curves, but it adds one additional sufficient statistic: the difference in marginal utilities between insured and uninsured. I provide an approach to estimate this statistic that uses only reduced-form willingness to pay and cost curves, combined with either a measure of risk aversion. I compare the approach to structural approaches that require fully specifying the choice environment and information sets of individuals. I apply the approach using existing willingness to pay and cost curve estimates from the low-income health insurance exchange in Massachusetts. Ex-ante optimal insurance prices are roughly 30% lower than prices that maximize market surplus. While mandates would increase deadweight loss, the results suggest they would actually increase ex-ante expected utility.

Suggested Citation

  • Nathaniel Hendren, 2018. "Measuring Ex-Ante Welfare in Insurance Markets," NBER Working Papers 24470, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:24470
    Note: AG EH IO LS PE
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    Cited by:

    1. Michael Geruso & Timothy J. Layton & Grace McCormack & Mark Shepard, 2023. "The Two-Margin Problem in Insurance Markets," The Review of Economics and Statistics, MIT Press, vol. 105(2), pages 237-257, March.
    2. Matthew Panhans, 2019. "Adverse Selection in ACA Exchange Markets: Evidence from Colorado," American Economic Journal: Applied Economics, American Economic Association, vol. 11(2), pages 1-36, April.

    More about this item

    JEL classification:

    • H0 - Public Economics - - General
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty

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