issues every plan to reform health care financing must confront this paper focuses on three main issues of fundamental health care reform first should experience rating the linkage of premiums to actual loss experience be retained despite widespread support for experience rating among economists the paper argues that it should be abandoned for reasons of efficiency and equity second would abandonment of experience rating cause much redistribution the paper shows that redistribution among industries could require significant transitional adjustments third should companies or individuals be subject to an insurance mandate the paper calls for combining individual mandates which have long term advantages with employer mandates which have short run pluses

relaxing intertemporal separability a rational habits model of labor supply estimated from panel data this article relaxes the assumption of separability of preferences over time that although implausible is usually maintained in life cycle labor supply models an empirically tractable rational habits model is specified and estimated on the basis of a 10 year sample of men from the michigan panel of income dynamics the effect of past hours of work in determining current hours decisions is found to be very important and well determined having allowed for permanent individual differences and for time effects

does financial education impact financial literacy and financial behavior and if so when in a meta analysis of 126 impact evaluation studies we find that financial education significantly impacts financial behavior and to an even larger extent financial literacy these results also hold for the subsample of randomized experiments rcts however intervention impacts are highly heterogeneous financial education is less effective for low income clients as well as in low and lower middle income economies specific behaviors such as the handling of debt are more difficult to influence and mandatory financial education tentatively appears to be less effective thus intervention success depends crucially on increasing education intensity and offering financial education at a teachable moment

claim timing and ex post adverse selection many health care treatments are not urgent and may be delayed if patients so choose because insurance coverage is typically determined by the treatment date individuals may have incentives to strategically delay treatments to minimize out of pocket costs the strategic delay of treatment a particular form of moral hazard can be an important source of subsequent adverse selection in which ex ante identical individuals select insurance coverage based on their differing accumulation of previously delayed treatments this article investigates these forces empirically in the context of the missing market for dental insurance using rich claim level data my analysis reveals that approximately 40 of individuals strategically delay dental treatments when incentivized to do so and this flexibility in delaying treatment can explain why the market for dental insurance has largely unraveled more generally the counterfactual analysis suggests features such as open enrolment periods and contracting on pre existing conditions may be helpful tools in overcoming adverse selection in insurance contexts where the timing of uncertainty is not contractible

public finance principles and national health care reform public finance principles though usually treated as a minor consideration lie at the heart of effective national health care reform four principles are discussed charge for a service where its cost is created distinguish rents resources and transfers know what services cost and pay accordingly balance distributional and equity concerns the principles implications include since employment does not much affect health costs financing particularly of incremental insureds need not be employer based health resources being immobile many cutbacks in expenditure will not reflect real resource savings and health care financing should mesh with an overall program of taxation and expenditure

welfare improving asymmetric information in dynamic insurance markets this article presents a two period asymmetric learning model of insurance markets when information about past accidents is not shared by insurers asymmetries of information develop through time equilibrium contracts exist are payoff unique and display a realistic bonus malus pattern eliminating asymmetries through information sharing is welfare decreasing in contrast with past contributions on insurance and adverse selection when second period contract offers cannot be contingent on initial contract choice a strict increase in welfare is obtained through menus of contracts although initial contract choice is in itself worthless information

interpreting the results of empirical analyses of intertemporal allocation an identification problem abstract empirical analyses of household behaviour often find that behaviour is intertemporally non additive in the sense that past state variables affect current behaviour this may be because preferences are nonadditive because of habits or satiation or because budgets are non additive for example because of human capital formation or imperfections in credit markets in this note i show that there is a fundamental identification problem in that we cannot infer from observed quantities and prices whether any nonadditivity in behaviour is coming from the budget constraint or the utility function

pricing and welfare in health plan choice premiums in health insurance markets frequently do not reflect individual differences in costs either because consumers have private information or because prices are not risk rated this creates inefficiencies when consumers self select into plans we develop a simple econometric model to study this problem and estimate it using data on small employers we find a welfare loss of 2 11 percent of coverage costs compared to what is feasible with risk rating only about one quarter of this is due to inefficiently chosen uniform contribution levels we also investigate the reclassification risk created by risk rating individual incremental premiums finding only a modest welfare cost

comment defining health insurance affordability unobserved heterogeneity matters affordability is a vague concept bundorf and pauly bundorf m k pauly m v 2006 is health insurance affordable for the uninsured journal of health economics 25 4 650 673 address this problem by establishing clear working definitions of affordability and they use these definitions to estimate the percent of the uninsured who can afford insurance when they establish their definitions of affordability they use a microeconomic model that omits essential characteristics of the health insurance market this comment suggests alternative definitions that better incorporate the structure of the health insurance market discusses both endogeneity and specification problems that might occur when implementing their econometric model to estimate the fraction of uninsured afforders and then recommends ways to reduce omitted variable bias and endogeneity bias

static and dynamic effects of health policy evidence from the vaccine industry public policies designed to increase utilization of existing technologies may also affect incentives to develop new technologies this paper investigates this phenomenon by examining policies designed to increase usage of preexisting vaccines i find that these policies were associated with a 2 5 fold increase in clinical trials for new vaccines for several diseases the induced innovation is socially wasteful though small in magnitude in one case however the dynamic social welfare benefits from induced innovation exceed the policies static benefits from increasing vaccination with existing technology these findings underscore the importance of including technological progress in economic analysis of public policy

making the implicit explicit a look inside the implicit discount rate implicit discount rates idrs are employed in energy models to capture household investment decisions yet the factors behind the idr and their respective implications for policy making usually remain blurred and fractional the proposed comprehensive framework distinguishes three broad categories of factors underlying the idr for household adoption of energy efficient technologies eets preferences notably over time risk loss debt and the environment predictable ir rational behavior bounded rationality rational inattention behavioral biases and external barriers to energy efficiency existing empirical findings suggest that the factors underlying the idrs that differ across household characteristics and technologies should be accounted for in energy models furthermore the framework allows for a fresh look at the interplay of idrs and policies we argue that a simple observation of high idrs or observing correlations between idrs and socio economic characteristics does not provide guidance for policy making since the underlying sources cannot be identified instead we propose that some of the factors underlying the idr notably external barriers can be changed through directed policy interventions whereas other factors notably preferences and predictable ir rational behavior are innate and can only be taken into account through reactive policy interventions

one pool to insure them all age risk and the price s of medical insurance asymmetric information can lead to adverse selection and market failure in a dynamic setting asymmetric information also limits reclassification risk this certainty offsets the costs of adverse selection using a dynamic model of endogenous insurance choice and price calibrated to the u s medical insurance market i find that asymmetric information is pareto improving when information is fully asymmetric however when insurers can discriminate by age group but not within age groups the young benefit by paying less for insurance the insurance market for the near elderly collapses because it is no longer implicitly subsidized by the participation of the young

equilibria in health exchanges adverse selection versus reclassification risk this paper studies equilibrium and welfare in a class of regulated health insurance markets known as exchanges we use detailed health plan choice and utilization data to model individual level i projected health risk and ii risk preferences we combine the estimated distributions of risk and risk preferences with a model of competitive insurance markets to predict allocations and prices

health and mortality delta assessing the welfare cost of household insurance choice we develop a pair of risk measures health and mortality delta for the universe of life and health insurance products a life cycle model of insurance choice simplifies to replicating the optimal health and mortality delta through a portfolio of insurance products we estimate the model to explain the observed variation in health and mortality delta implied by the ownership of life insurance annuities including private pensions and long term care insurance in the health and retirement study for the median household aged 51 to 57 the lifetime welfare cost of market incompleteness and suboptimal choice is 3 2 of total wealth

is there dynamic adverse selection in the life insurance market abstract this paper finds evidence of dynamic adverse selection in the life insurance market lower risk individuals are more likely to cancel a policy and to cancel one of greater face value conditional on cancelation than are individuals with higher mortality risk

the inefficiency of refinancing why prepayment penalties are good for risky borrowers abstract this paper provides a theoretical analysis of the efficiency of prepayment penalties in a dynamic competitive lending model with risky borrowers and costly default when considering improvements in the borrower s creditworthiness as one of the reasons for refinancing mortgages we show that refinancing penalties can be welfare improving and that they can be particularly beneficial to riskier borrowers in the form of lower mortgage rates reduced defaults and increased availability of credit thus a high concentration of prepayment penalties among the riskiest borrowers can be an outcome of efficient equilibrium in a mortgage market we also provide empirical evidence that is consistent with the key predictions of our model

two improvements on the clinton framework i t is wonderful that the clinton administration has created the possibility of major reform of health insurance and medical care while the clinton proposal has many good features this comment will suggest two improvements in its present form the clinton proposal allows states to set up a single payer system or to organize the insurance market making heavy use of large regional alliances i will suggest that states should be allowed a third alternative to organize the insurance market with small alliances an advantage of small alliances comes from the distinction between group and individual purchase of insurance as developed below the second suggested improvement involves the question of rationing which is present now and is inevitable in any system for allocating resources the question is who does it and how the clinton plan chooses to offer relatively comprehensive health insurance coverage to all a more efficient form of rationing might offer basic coverage to all making more use of individually purchased supplemental policies as part of the rationing mechanism

choosing what i want versus rejecting what i do not want an application of decision framing to product option choice decisions abstract the authors examine the effects of using a subtractive versus an additive option framing method on consumers option choice decisions in three studies the former option framing method presents consumers with a fully loaded product and asks them to delete options they do not want the latter presents them with a base model and asks them to add the options they do want combined the studies support the managerial attractiveness of the subtractive versus the additive option framing method consumers tend to choose more options with a higher total option price when they use subtractive versus additive option framing this effect holds across different option price levels study 1 and product categories of varying price study 2 moreover this effect is magnified when subjects are asked to anticipate regret from their option choice decisions study 2 however option framing has a different effect on the purchase likelihood of the product category itself depending on the subject s initial inter

incentive compatible guaranteed renewable health insurance premiums theoretical models of guaranteed renewable insurance display front loaded premium schedules such schedules both cover lifetime total claims of low risk and high risk individuals and provide an incentive for those who remain low risk to continue to purchase the policy questions have been raised of whether actual individual insurance markets in the us approximate the behavior predicted by these models both because young consumers may not be able to afford front loading and because insurers may behave strategically in ways that erode the value of protection against risk reclassification in this paper the optimal competitive age based premium schedule for a benchmark guaranteed renewable health insurance policy is estimated using medical expenditure data several factors are shown to reduce the amount of front loading necessary indeed the resulting optimal premium path increases with age actual premium paths exhibited by purchasers of individual insurance are close to the optimal renewable schedule we estimate finally consumer utility associated with the feature is examined

medical care costs how much welfare loss hardly a week goes by without a front page newspaper article on rising health care costs and the uninsured in this article i focus mainly on costs arguing that the issue has been somewhat misconceived while the level of medical care spending in the u s is a cause for concern the welfare losses associated with rises in that level of spending may not be as large as the public rhetoric can make them seem in fact cost containment may not be as urgent as is widely supposed and some proposed cost containment policies may result in welfare losses for the insured and even increase the number of uninsured

do firms underinvest in long term research evidence from cancer clinical trials we investigate whether private research investments are distorted away from long term projects our theoretical model highlights two potential sources of this distortion short termism and the fixed patent term our empirical context is cancer research where clinical trials and hence project durations are shorter for late stage cancer treatments relative to early stage treatments or cancer prevention using newly constructed data we document several sources of evidence that together show private research investments are distorted away from long term projects the value of life years at stake appears large we analyze three potential policy responses surrogate non mortality clinical trial endpoints targeted r d subsidies and patent design jel d92 g31 i11 l65 o31 o34

dynamic inefficiencies in an employment based health insurance system theory and evidence we investigate the effects of the institutional settings of the us health care system on individuals life cycle medical expenditures health is a form of general human capital labor turnover and labor market frictions prevent an employer employee pair from capturing the entire surplus from investment in an employee s health thus the pair underinvests in health during working years thereby increasing medical expenditures during retirement we provide empirical evidence consistent with the comparative statics predictions of our model using the medical expenditure panel survey meps and the health and retirement study hrs our estimates suggest significant inefficiencies in health investment in the united states

neglected risks the psychology of financial crises sometimes referred to as mit shocks e g caballero and simsek 2013 are consistent with rational expectations in that investors recognize that there is a small chance that the shock might occur but they are harder to reconcile with the reinhart rogoff 2009 observation that crises are not that unusual the 2008 financial crisis in the united states has deepened the challenge by bringing up direct evidence that investors underestimated the risk of a crisis coval jurek and stafford 2009 show that investors underestimated the probability of mortgage defaults in pricing mortgage backed securities foote gerardi and willen 2012 find that investors did not even contemplate the magnitude of home price declines that actually materialized rather than being considered unlikely the risks appear to have been entirely neglected we need a theory of beliefs consistent with sharp underestimates of the odds of a crisis in this paper we present a psychological theory of the neglect of risk and financial crises the theory seeks to explain precisely why the probability estimates of a crisis in a boom are too low offering a foundation of unanticipated shocks and of zero probabilities attached to some states of the world by investors gennaioli shleifer and vishny 2012 our theory yields boom bust financial crises based entirely on beliefs we do not incorporate into the model any economic mechanisms that amplify the shocks such as fire

health care costs on the rise again since 1999 health care costs have been growing faster than national income this rapid growth has occurred as the ability of private and public purchasers to reduce service utilization and bargain for lower prices has fallen insurers have recouped lost profits through higher premiums and new technologies have driven up costs throughout the sector private insurance market responses to these rising costs may lead to reductions in the number of people with insurance and to increased fragmentation of the insurance market over time technological change in medicine both increases costs and improves the quality of care the challenge for public policy is to maintain insurance and some degree of equity in the face of these rising costs

does the secondary life insurance market threaten dynamic insurance there is a vast theoretical literature on dynamic contracts which has received very little empirical attention exceptions are pierre andr chiappori bernard salanie and julie valentin 1999 and hendel and lizzeri 2003 this paper describes how a recent development in the life insurance market further illustrates the usefulness and power of the dynamic risk sharing learning model originally proposed by milton harris and bengt holmstr m 1982 life settlements are a recent innovation in the life insurance markets secondary markets for life insurance policies started in large scale in the late 1980s in response to the aids epi demic terminally ill policyholders exchanged their coverage for liquidity provided by a third party a viatical firm in the late 1990s a mar ket for nonterminal settlements emerged creat ing a secondary market for long term policies a policy holder with a life expectancy not exceed ing 15 years can sell the policy to intermediaries who continue to pay the premiums in exchange for becoming the beneficiaries 1 although esti mates differ the amount of settled insurance has been growing rapidly from approximately 2 billion in face amounts in 2002 to a recent estimate by conning research and consulting 2007 suggesting settlements as high as 6 1 billion in 2006 settlements generate a health contingent liquidation value for life insurance policies this is an innovation in life insurance term policies typically offer no liquidation value and cash value policies offer surrender values that are independent of health status they reflect average mortality in the pool the gap between surrender values and actuarial value of existing policies which can be quite large is the target of the settlement industry 2 currently the settle ment industry targets the stock of long standing policies that were issued before the emergence of this market life insurance companies are now beginning however to react by modifying contracts

naive diversification strategies in defined contribution saving plans there is a worldwide trend toward defined contribution saving plans and growing interest in privatized social security plans in both environments individuals are given some responsibility to make their own asset allocation decisions raising concerns about how well they do at this task this paper investigates one aspect of the task namely diversification it is shown that some investors follow the 1 n strategy they divide their contributions evenly across the funds offered in the plan consistent with this naive notion of diversification it is found that the proportion invested in stocks depends strongly on the proportion of stock funds in the plan

why does the law of one price fail an experiment on index mutual funds we conduct an experiment to evaluate why individuals invest in high fee index funds in our experiments subjects allocate 10 000 across four s p 500 index funds and are rewarded for their portfolio s subsequent return subjects overwhelmingly fail to minimize fees we can reject the hypothesis that subjects buy high fee index funds because of bundled non portfolio services search costs for fees matter but even when we eliminate these costs fees are not minimized instead subjects place high weight on annualized returns since inception fees paid decrease with financial literacy interestingly subjects who choose high fee funds sense they are making a mistake

knowledge of future job loss and implications for unemployment insurance this paper studies the implications of individuals knowledge of future job loss for the existence of an unemployment insurance ui market learning about job loss leads to consumption decreases and spousal labor supply increases this suggests existing willingness to pay estimates for ui understate its value but it yields new estimation methodologies that account for and exploit responses to learning about future job loss although the new willingness to pay estimates exceed previous estimates i estimate much larger frictions imposed by private information this suggests privately traded ui policies would be too adversely selected to be profitable at any price

short term contracts and long term agency relationships abstract long term contracts are valuable only if optimal contracting requires commitment to a plan today that would not otherwise be adopted tomorrow we show that commitments are unnecessary and hence short term contracts are sufficient if 1 all public information can be used in contracting 2 the agent can acess a bank on equal terms with the principal 3 recontracting takes place with common knowledge about technology and preferences and 4 the frontier of expected utility payoffs generated by the set of incentive compatible contracts is downward sloping at all times

on the exploitation of additional duality relationships in consumer demand analysis abstract this paper advocates more extensive use of the frisch profit function in static consumer demand studies and intorduces its inverse the price of utility function paralleling the well known relationships between indirect utility and expenditure functions an examination of the relationship between these four functions suggests i a fourth system complementing marshallian hicksian and frisch demand systems and ii a fourth theorem complementing roy s identity shephard s theorem and hoteling s lemma

intertemporal substitution exogeneity and surprises estimating life cycle models for canada the authors estimate consumption and labor supply models for canada using u s variables as instruments instead of lagged canadian variables the results suggest that the endogeneity of lagged variables has not been a serious problem in previous studies they also develop estimation methods for use when the agents information sets are unknown and the model contains the realization and the innovation of an endogenous variable the authors use the approach to estimate a labor supply model combining intertemporal substitution and job search and to estimate the labor supply and consumption responses to marginal utility of income changes induced by wage price and interest rate surprises

persistence in medicare reimbursements and personal medical accounts this study uses the continuous medicare history sample cmhs a longitudinal sample of medicare beneficiaries from 1974 to 1997 to identify persistence in medicare reimbursements consistent estimates of medicare reimbursement persistence are obtained using a dynamic panel tobit model lagged reimbursements are statistically significant in explaining a beneficiary s current year reimbursements yet their effect is moderate in magnitude an additional dollar of medicare spending in the previous year gives rise to 0 19 in spending in the current year for those who have positive expenditures and the effect ranges between 0 16 and 0 25 past spending patterns for up to 5 years are also used to evaluate the out of sample prediction capabilities of a multi equation cross sectional model simulated spending patterns for several cohorts are derived and compared to actual spending the simulated spending distributions are used to study the feasibility of establishing retirement health accounts for medicare patients

structural adjustment and soil degradation in tanzania a cge model approach with endogenous soil productivity abstract in this paper a model of the nitrogen cycle in the soil is incorporated in a computable general equilibrium cge model of the tanzanian economy thus establishing a two way link between the environment and the economy for a given level of natural soil productivity profit maximising farmers choose input levels and hence production volumes which in turn influence soil productivity in the following years through the recycling of nitrogen from the residues of roots and stover and the degree of erosion the model is used to simulate the effects of typical structural adjustment policies like a reduction in agro chemicals subsidies reduced implicit export tax rate etc after 10 years the result of a joint implementation is a 9 higher gross domestic product gdp level compared to the baseline scenario the effect of soil degradation is found to represent a reduction in the gdp level of more than 5 for the same time period

an implicitly additive demand system the problem of endowing large applied general equilibrium models with numerical values for parameters is formidable for example a complete set of own and cross price elasticities of demands for the monash model of the australianeconomy involves in excess of 50000 items invoking the minimal assumptions that demand is generated by utility maximization reduces the load to about 26000 obviously still a number much too large for unrestrained econometric estimation to obtain demand systems estimates for a dozen or so generic commodities at a top level of aggregation categories like food clothing and footwear etc typically johansen s lead has been followed and directly additive preferences imposed upon the underlying utility function with the move beyond one step linearized solutions of applied general equilibrium models the functional form of the demand system adopted becomes an issue the most celebrated of the additive preference demand systems the linear expenditure system les has one

time consistent health insurance currently available health insurance contracts often fail to insure long term illnesses sick people can suffer large increases in premiums or denial of coverage i describe insurance contracts that solve this problem their key feature is a severance payment a person who is diagnosed with a long term illness and whose premiums are increased receives a lump sum equal to the increased present value of premiums this lump sum allows him or her to pay the higher premiums required by any insurer people are not tied to a particular insurer or a group and the improvement is free insurance companies can operate at zero economic profits and consumers can pay exactly the same premium they do with standard contracts

towards a more general approach to testing the time additivity hypothesis a new procedure is proposed for re examining the assumption of additivity of preferences over time which although untenable is usually maintained in intertemporal analyses of consumption and labour supply the method is an extension of a famous work by browning however it is more general in permitting the estimation of intertemporal demand systems which are explicit in an unobservable variable price of utility but may lack a closed form representation in terms of observable variables such as prices and total outlay it also makes extensive use of duality theory to solve the endogeneity problem encountered in browning s study applying this method with an appropriate estimator to the australian aggregate data it is found that the time additivity hypothesis is decisively rejected which is consistent with browning s conclusion

optimal consumption wealth relationships derived by consumer intertemporal profit maximisation abstract this paper proposes an artificial intertemporal consumer profit maximisation problem that is simple to solve the optimal consumption function which is consistent with intertemporal utility maximisation is then generated directly from a specification of the consumer s instantaneous profit function

the reliability of ml estimators of systems of demand equations evidence from oecd countries in large demand systems when the unknown error covariance matrix is approximated by its usual maximum likelihood estimator the coefficient estimates are known to suffer from two problems 1 the asymptotic standard errors severely understate the sampling variability of the estimates and 2 the efficiency of the maximum likelihood coefficient estimates is greatly impaired in this paper the author proposes an alternative estimator for the covariance matrix and evaluates its performance using time series data for oecd countries the author finds that there is a spectacular improvement copyright 1991 by mit press

long term short term and renegotiation on the value of commitment in contracting spot contracting generally involves efficiency losses relative to long term contracting it is proved here that short term contracting and renegotiation allow to achieve long run efficiency when transfers are not limited objectives are conflicting and no relevant asymmetric information appears at recontracting dates this last assumption excludes adverse selection but not moral hazard when technologies and preferences are time separable copyright 1990 by the econometric society

the insurance value of state tax and transfer programs abstract this paper estimates the total value that individuals derive from their state s tax and transfer program and shows how this value varies by income the paper decomposes this total value into two components redistributive value which is due to predictable changes in income and family circumstances and insurance value which occurs when taxes and transfers compensate for unexpected income shocks our approach is a forward looking one where we examine income and transfers net of taxes over a 10 year period we model state taxes personal income taxes the eitc and sales taxes and state means tested transfers afdc tanf and medicaid schip the calculations are made using the panel study of income dynamics and allow for analysis of the role of changes in tax and transfer programs demographics and income in the value of state net benefits over a period of more than 30 years we find that the redistributive value of state tax and transfer programs sharply declines with income but that the insurance value is increasing in income the resulting total value still declines with income but not nearly as sharply as the redistributive value hence the insurance value mitigates the incentives for mobility that would undo state redistributive spending

the role of commitment in dynamic contracts evidence from life insurance we use data on life insurance contracts to study the properties of long term contracts in a world where buyers cannot commit to a contract the data are especially suited to test a theory of dynamic contracting since they include information on the entire proele of future premiums all the patterns in the data et the theoretical predictions of a model with symmetric learning and one sided com

design choices in privatized social security systems learning from the swedish experience in the 2000 u s presidential campaign george w bush advocated a partial privatization of the social security system according to his plan a portion of the payroll tax would be designated for individual savings accounts at the same time as this issue was being debated in the united states sweden was in the process of launching a system that is very similar to president bush s proposal although bush s plan did not get much attention in the early years of his administration the proposal may resurface either in the united states or in other countries if so important lessons can be learned from the swedish experience in particular the swedish plan adopted an interesting mix of design choices that can now be evaluated based on three years of post implementation experience although there is a large literature in economics on the design of social security systems most of that literature is concerned with macroeconomic considerations such as funding in contrast there has been much less attention devoted to the details of how plans might be designed in part because these details do not seem important from a standard economic perspective in this paper we reverse this usual pattern and focus our attention on the design aspects of the swedish plan we find that although most of the design choices are those that might be approved by most economists in some cases these choices produced undesirable consequences

rational habit formation abstract this paper discusses consumer demand under rational habit formation if consumer tastes change endogenously through habit stocks depending on past consumption the rational consumer will make allowance of the future habit forming effects of current consumption a model with rational habit formation is made formally equivalent to an intertemporal consumer model without habit formation by redefining the cost of consumption and wealth the cost of consumption is obtained by adding the cost of future induced consumption to the rental price of the commodity the extended wealth concept is obtained by subtracting the cost of the initial stocks of habits and the cost of future physically necessary consumption from wealth the paper also investigates the implication of rational habit formation for constructing one period cost of living indices

an empirically oriented demand system with improved regularity properties while the almost ideal demand system has received increasing attention in empirical studies of consumer demand the fact that the underlying piglog cost function is not globally regular has often led to violation of negative semidefiniteness in the estimated slutsky matrix this paper suggests a modification to the piglog class of preferences termed mpiglog which preserves regularity in a wider region of expenditure price space in an empirical section the almost ideal demand system special case of piglog is compared with the analogous special case of mpiglog which the authors term maids the comparison demonstrates the improved regularity features of maids

selection in health insurance markets and its policy remedies selection adverse or advantageous is the central problem that inhibits the smooth efficient functioning of competitive health insurance markets even and perhaps especially when consumers are well informed decision makers and insurance markets are highly competitive and offer choice such markets may function inefficiently due to risk selection selection can cause markets to unravel with skyrocketing premiums and can cause consumers to be under or overinsured in its simplest form adverse selection arises due to the tendency of those who expect to incur high health care costs in the future to be the most motivated purchasers the costlier enrollees are more likely to become insured rather than to remain uninsured and conditional on having health insurance the costlier enrollees sort themselves to the more generous plans in the choice set these dual problems represent the primary concerns for policymakers designing regulations for health insurance markets in this essay we review the theory and evidence concerning selection in competitive health insurance markets and discuss the common policy tools used to address the problems it creates we emphasize the two markets that seem especially likely to be targets of reform in the short and medium term medicare advantage the private plan option available under medicare and the state level individual insurance markets

optimal defaults and active decisions defaults often have a large influence on consumer decisions we identify an overlooked but practical alternative to defaults requiring individuals to make an explicit choice for themselves we study such active decisions in the context of 401 k saving we find that compelling new hires to make active decisions about 401 k enrollment raises the initial fraction that enroll by 28 percentage points relative to a standard opt in enrollment procedure producing a savings distribution three months after hire that would take 30 months to achieve under standard enrollment we also present a model of 401 k enrollment and derive conditions under which the optimal enrollment regime is automatic enrollment i e default enrollment standard enrollment i e default non enrollment or active decisions i e no default and compulsory choice active decisions are optimal when consumers have a strong propensity to procrastinate and savings preferences are highly heterogeneous financial illiteracy however favors default enrollment over active decision enrollment

the cost of soil erosion in nicaragua the cost of soil erosion is not so much dependent on the physical amount of soil lost as determined by the economic effects of these losses soil erosion has both onsite and offsite effects loss of soil productivity is the main onsite effect while enhanced productivity of downstream land sedimentation and eutrophication of waterways and reservoirs are common offsite effects in this paper we consider only the onsite effects of erosion the loss of agricultural productivity is however studied within a broader economic framework than usual by incorporating the direct economic effects of soil loss into a general equilibrium model it is possible to shed light on some of the many interlinkages between agricultural activity and other parts of the economy which are important for determining the social cost of soil erosion based on model simulations we find that soil erosion represents a considerable drag on the nicaraguan economy but that the burden of soil erosion depends on conditions and policies in non agricultural markets such as the labour market furthermore the sharing of the burden is not always to the disadvantage of the peasants while uncertainties in data and modelling prevent us from drawing strong conclusions the present study underlines the importance of considering the overall economic environment when policy proposals for mitigating excessive soil erosion is formulated

dynamic inefficiencies in insurance markets evidence from long term care insurance we examine whether unregulated private insurance markets efficiently provide insurance against reclassification risk the risk of becoming a bad risk and facing higher premiums to do so we examine the ex post risk type of individuals who drop their long term care insurance contracts relative to those who are continually insured consistent with dynamic inefficiencies we find that individuals who drop coverage are of lower risk ex post than individuals who were otherwise equivalent at the time of purchase but who do not drop out of their contracts these findings suggest that dynamic market failures in private insurance markets can preclude the efficient provision of insurance against reclassification risk this abstract was borrowed from another version of this item

new evidence on the money s worth of individual annuities this paper presents new information on the expected present discounted value of payouts on individual life annuities the annuity we examine is the single premium immediate life annuity an insurance product that pays out a nominal level sum as long as the covered person lives in exchange for an initial lump sum premium this annuity offers protection against the risk of someone outliving his saving given uncertainty about longevity for reasonable estimates of behavioral parameters we calculate that individual annuities are currently priced so that retirees without bequest motives should find these policies of substantial value in configuring their portfolios to smooth retirement consumption we also find that the expected present discounted value of payouts relative to the initial cost of the annuity has increased over the last decade these findings bear on the policy debate regarding the role of individual choice and self reliance in retirement planning this abstract was borrowed from another version of this item

the intertemporal allocation of expenditure on non durables services and durables this paper presents estimates of the parameters of a consumption function for u s quarterly seasonally unadjusted data on non durables services and durables the theoretical novelty in the approach we present is in the derivation of the consumption function from an underlying many goods allocation problem applying this model with an appropriate estimator to the data we find i the homogeneity restrictions suggested by theory are not rejected ii there is no evidence of excess sensitivity to income iii there is no evidence to suggest that agents cannot adjust their durable stocks as they would wish and iv the intertemporal substitution elasticity is not well determined

hartwick s rule in open economies to sustain constant consumption the hartwick rule prescribes reinvesting all resource rents in reproducible capital this paper shows that the rule does not apply to open economies since the underlying stationary technology assumption is violated when gains from trade are taken into account a correct analog to the hartwick rule for open economies is developed and applied to a model of capital accumulation and resource depletion la regle de hartwick dans les e conomies ouvertes pour maintenir la consommation constante la regle de hartwick prescrit qu il faut reinvestir toutes les rentes des ressources dans du capital reproductible ce me moire montre que la regle ne s applique pas dans le cas d economies ouvertes parce que le postulat d une technologie stationnaire n9est pas satisfait quand on tient compte des gains engendres par le commerce international l auteur developpe une version correcte pour les economies ouvertes dans 1 esprit de la regle de hartwick et l applique a un modele d accumulation de capital et d epuisement des ressources

reprint of the insurance value of state tax and transfer programs abstract this paper estimates the total value that individuals derive from their state s tax and transfer program and shows how this value varies by income the paper decomposes this total value into two components redistributive value which is due to predictable changes in income and family circumstances and insurance value which occurs when taxes and transfers compensate for unexpected income shocks our approach is a forward looking one where we examine income and transfers net of taxes over a 10 year period we model state taxes personal income taxes the eitc and sales taxes and state means tested transfers afdc tanf and medicaid schip the calculations are made using the panel study of income dynamics and allow for analysis of the role of changes in tax and transfer programs demographics and income in the value of state net benefits over a period of more than 30 years we find that the redistributive value of state tax and transfer programs sharply declines with income but that the insurance value is increasing in income the resulting total value still declines with income but not nearly as sharply as the redistributive value hence the insurance value mitigates the incentives for mobility that would undo state redistributive spending

the multiperiod principal agent problem in repeated principal agent models long term contracts can improve on short term contracts only if they commit either principal or agent to a payoff in some future circumstance lower than could be obtained from a short term contract negotiated if that circumstance occurs we show that efficient contracting under moral hazard alone does not require long term commitment from the principal provided a short term contract can punish the agent sufficiently in a sense made precise it requires no commitment from the agent either then linking payoffs in one period to outcomes in previous periods does not improve the tradeoff between incentives and risk sharing

intertemporal substitution in import demand and habit formation to study non durable import demand we extend previous work done by clarida 1994 and ceglowski 1991 by considering a two good version of the lifecycle model in which we introduce time non separability in the households preferences the model is estimated using quarterly data for the usa and france using the information contained in the observed stochastic and deterministic trends we derive a cointegration restriction used to estimate curvature parameters of the instantaneous utility function the remaining parameters are estimated in a second step by gmm the constancy of the different parameters is investigated in both the long and the short run habit formation turns out to be an important factor of import demand c 1998 john wiley sons ltd

the cost of financial frictions for life insurers during the financial crisis life insurers sold long term policies at deep discounts relative to actuarial value the average markup was as low as 19 percent for annuities and 57 percent for life insurance this extraordinary pricing behavior was due to financial and product market frictions interacting with statutory reserve regulation that allowed life insurers to record far less than a dollar of reserve per dollar of future insurance liability we identify the shadow cost of capital through exogenous variation in required reserves across different types of policies the shadow cost was 0 96 per dollar of statutory capital for the average company in november 2008 jel g01 g22 g28 g32

organizing the health insurance market this paper presents a new approach to organizing universal health insurance first the government divides the entire population into many large groups then the government creates a federal health insurance system healthfed modeled on the federal reserve system to fill the role now played by the benefits office of a large firm the healthfed would create a short menu of alternatives solicit bids for insuring the entire group and price alternatives there would be redistribution between groups and pricing of alterna tives to reflect optimal social insurance principles there would be no connection between health insurance and employment it may seem odd that this presidential address is my first publication in health economics at the time when i might have been working on an alternative address i was chair of an expert panel for the advisory council on social security looking at issues in both retirement income and medical care 2 in the process of this work i have come up with a new approach to organizing universal health insurance that is the subject of this paper before starting on health insurance i will say a few words about a wider context offering what i will say as an example in that setting 3 a great deal of attention has been focused on the exciting issue of reorganizing economies dropping central planning commonly economists from those countries em brace capitalism or more specifically laissez faire competition with an enthusi asm which exceeds that ofwestern economists although not necessarily western businessmen yet laissez faire capitalism has received little serious support in the west for a very long time we all know the fundamental welfare theorem which shows many ways that capitalism can be imperfect we have also seen a growth in discussion and analysis of the many ways governments can mess up resource allocation the real question is the design of arrangements that try to integrate the things that each type of institution does better this is hard for two reasons one is that it is in the realm of second best with many constraints the more the constraints the harder the analysis the second is that we do not have good positive theories of government behavior good examples yes good theories no thus the analysis is more intuitive less theory driven than in our picture of private markets but also in our private market analyses we have been greatly complicating our picture recognizing all sorts of information imperfec tions that affect the way that private markets work so i will present to you a proposal for universal health insurance meant to combine something that