behavioral hazard in health insurance a fundamental implication of standard moral hazard models is overuse of low value medical care because copays are lower than costs in these models the demand curve alone can be used to make welfare statements a fact relied on by much empirical work there is ample evidence though that people misuse care for a different reason mistakes or behavioral hazard much high value care is underused even when patient costs are low and some useless care is bought even when patients face the full cost in the presence of behavioral hazard welfare calculations using only the demand curve can be off by orders of magnitude or even be the wrong sign we derive optimal copay formulas that incorporate both moral and behavioral hazard providing a theoretical foundation for value based insurance design and a way to interpret behavioral nudges once behavioral hazard is taken into account health insurance can do more than just provide financial protection it can also improve health care efficiency jel codes d03 i12 i13 i30 i38

a welfare measure of offset effects in health insurance abstract changing health insurance coverage for one service may affect use of other insured services when improving coverage for one service reduces use of another the savings are referred to as offset effects for example costs of better coverage for prescription drugs may be partly offset by reductions in hospital costs offset effects have welfare implications but it has not been clear how to value these impacts in design of health insurance we show that plan paid rather than total spending is the right welfare measure of the offset effect and go on to develop a sufficient statistic for evaluating the welfare effects of change in coverage in the presence of multiple goods we derive a simple rule for when a coverage improvement increases welfare due to offset effects

choose to lose health plan choices from a menu with dominated option we examine the health plan choices that 23 894 employees at a u s firm made from a large menu of options that differed only in financial cost sharing and premium these decisions provide a clear test of the predictions of the standard economic model of insurance choice in the absence of choice frictions because plans were priced so that nearly every plan with a lower deductible was financially dominated by an otherwise identical plan with a high deductible we document that the majority of employees chose dominated plans which resulted in excess spending equivalent to 24 of chosen plan premiums low income employees were significantly more likely to choose dominated plans and most employees did not switch into more financially efficient plans in the subsequent year we show that the choice of dominated plans cannot be rationalized by standard risk preference or any expectations about health risk testing alternative explanations with a series of hypothetical choice experiments we find that the popularity of dominated plans was not primarily driven by the size and complexity of the plan menu nor informed preferences for avoiding high deductibles but by employees lack of understanding of health insurance our findings challenge the standard practice of inferring risk preferences from insurance choices and raise doubts about the welfare benefits of health reforms that expand consumer choice

overconfidence and asymmetric information the case of insurance this paper contributes to the recent behavioral economics literature by showing that whether or not overconfidence changes qualitative predictions in asymmetric information markets may depend on the market structure itself we first show that overconfidence may overturn fundamental relations between observable variables in perfect competition asymmetric information insurance markets in monopolistic insurance markets in constrast we find that overconfidence may be observationally equivalent to variations in the risk composition of the economy our analysis provides a number of novel testable implications on i price heterogeneity within and across risk classes ii the relationship between ex post risk and insurance coverage iii the fact that a significant fraction of agents chooses to be uninsured and iv the relationship between underinsurance and age

do pharmacists buy bayer informed shoppers and the brand premium we estimate the effect of information and expertise on consumers willingness to pay for national brands in physically homogeneous product categories in a detailed case study of headache remedies we find that more informed or expert consumers are less likely to pay extra to buy national brands with pharmacists choosing them over store brands only 9 percent of the time compared to 26 percent of the time for the average consumer in a similar case study of pantry staples such as salt and sugar we show that chefs devote 12 percentage points less of their purchases to national brands than demographically similar nonchefs we extend our analysis to cover 50 retail health categories and 241 food and drink categories the results suggest that misinformation and related consumer mistakes explain a sizable share of the brand premium for health products and a much smaller share for most food and drink products we tie our estimates together using a stylized model of demand and pricing

strict rational expectations equilibria with diffuseness abstract for smooth static pure exchange economies under uncertainty it is shown that a diffuseness condition on the distribution of traders characteristics as the state of the world varies permits one to use only a weak dimensionality restriction in the proof of the genericity of existence of strict rational expectations equilibria a generic result on the amount of information conveyed by equilibrium price functions and comparisons with some examples of nonexistence are given

is addiction rational theory and evidence this paper makes two contributions to the modeling of addiction first we provide new and convincing evidence that smokers are forward looking in their smoking decisions using state excise tax increases that have been legislatively enacted but are not yet effective and monthly data on consumption second we recognize the strong evidence that preferences with respect to smoking are time inconsistent with individuals both not recognizing the true dife culty of quitting and searching for self control devices to help them quit we develop a new model of addictive behavior that takes as its starting point the standard rational addiction model but incorporates time inconsistent preferences this model also exhibits forward looking behavior but it has strikingly different normative implications in this case optimal government policy should depend not only on the externalities that smokers impose on others but also on the internalities imposed by smokers on themselves we estimate that the optimal tax per pack of cigarettes should be at least one dollar higher under our formulation than in the rational addiction case

the questionable value of having a choice of levels of health insurance coverage in most health insurance markets in the united states consumers have substantial choice about their health insurance plan however additional choice is not an unmixed blessing as it creates challenges related to both consumer confusion and adverse selection there is mounting evidence that many people have difficulty understanding the value of insurance coverage like evaluating the relative benefits of lower premiums versus lower deductibles also in most us health insurance markets people cannot be charged different prices for insurance based on their individual level of health risk this creates the potential for well known problems of adverse selection because people will often base the level of health insurance coverage they choose partly on their health status in this essay we examine how the forces of consumer confusion and adverse selection interact with each other and with market institutions to affect how valuable it is to have multiple levels of health insurance coverage available in the market

on the generic existence of fully revealing price equilibria abstract in an asset trading model the generic existence of rational expectations equilibrium established by radner requires an assumption which is not shown to be generic a regularity condition is imposed on the relative risk aversion of the utility function to eliminate the assumption

the effect of insurance coverage on preventive care despite the growth in health insurance products that differentially cover preventive care and nonpreventive care little is known about how preventive care utilization responds to targeted changes in coverage using administrative data from a large company this paper examines the implementation of an insurance benefit design which differentially increased the price of nonpreventive care while decreasing the price of prevention leveraging a difference in differences research strategy we find that preventive care utilization did not increase and even declined due to the differential price change this evidence indicates a meaningful negative cross price effect suggesting that nonpreventive care and preventive care are complements jel i13 i11

error correction mechanisms the interface between economic theory and applied econometrics is often one of uneasy compromise with the pragmatic justification for many accepted procedures resting on a theoretical base this paper examines the surprisingly strong arguments that exist in terms of economic theory for the use of error correction mechanisms in the specification of short run dynamic adjustment a common heresy exists that while economic theory provides a detailed analysis of comparative static equilibria it can offer no guidance as to the appropriate specification of dynamic adjustment towards an equilibrium perhaps in consequence it is not uncommon to find examples where the necessary dynamic specification is achieved by tacking onto an existing equilibrium specification some relatively ad hoc short run adjustment scheme the intercession of stochastic arguments in this process is confused and critical implications are frequently ignored in practice but perhaps more importantly there will typically be no guarantee that the dynamic specification is consistent with the prescribed equilibrium consistency in this sense requires that the short run dynamic adjustment be directed by the perceived disequilibrium and that eventual convergence to the equilibrium position be ensured that two separate theoretical arguments co exist within the final specification is the root cause of many difficulties both theoretical and empirical this abstract was borrowed from another version of this item

moral hazard in insurance value based cost sharing and the benefits of blissful ignorance the conventional theory of optimal coinsurance rates for health insurance with moral hazard indicates that coinsurance should vary with the price responsiveness or price elasticity of demand for different medical services an alternative theory called value based cost sharing indicates that coinsurance should be lower for services with higher marginal benefits relative to costs this paper reconciles the two views it shows that if patient demands are based on correct information optimal coinsurance is the same under either theory if patient demands differ from informed demands optimal coinsurance depends both on information imperfection and price responsiveness value based cost sharing can be superior to providing information even if the cost of information is minimal when patient demands fall short of informed demands an extended numerical example illustrates these points

salience and consumer choice we present a theory of context dependent choice in which a consumer s attention is drawn to salient attributes of goods such as quality or price an attribute is salient for a good when it stands out among the good s attributes relative to that attribute s average level in the choice set or more broadly the choice context consumers attach disproportionately high weight to salient attributes and their choices are tilted toward goods with higher quality price ratios the model accounts for a variety of disparate evidence including decoy effects and context dependent willingness to pay it also suggests a novel theory of misleading sales

what does a deductible do the impact of cost sharing on health care prices quantities and spending dynamics measuring consumer responsiveness to medical care prices is a central issue in health economics and a key ingredient in the optimal design and regulation of health insurance markets we study consumer responsiveness to medical care prices leveraging a natural experiment that occurred at a large self insured firm which required all of its employees to switch from an insurance plan that provided free health care to a non linear high deductible plan the switch caused a spending reduction between 11 79 13 80 of total firm wide health spending we decompose this spending reduction into the components of i consumer price shopping ii quantity reductions and iii quantity substitutions finding that spending reductions are entirely due to outright reductions in quantity we find no evidence of consumers learning to price shop after two years in high deductible coverage consumers reduce quantities across the spectrum of health care services including potentially valuable care e g preventive services and potentially wasteful care e g imaging services we then leverage the unique data environment to study how consumers respond to the complex structure of the high deductible contract we find that consumers respond heavily to spot prices at the time of care and reduce their spending by 42 when under the deductible conditional on their true expected end of year shadow price and their prior year end of year marginal price in the first year post plan change 90 of all spending reductions occur in months that consumers began under the deductible with 49 of all reductions coming for the ex ante sickest half of consumers under the deductible despite the fact that these consumers have quite low shadow prices there is no evidence of learning to respond to the true shadow price in the second year post switch

the demand for m1 in the u s a 1960 1988 estimated u s m1 demand functions appear unstable regularly breaking down over 1960 1988 e g missing money great velocity decline m1 explosion we propose a money demand function whose arguments include inflation real income long term bond yield and risk t bill interest rates and learning curve weighted yields on newly introduced instruments in m1 and non transactions m2 the model is estimated in dynamic error correction form it is constant and with an equation standard error of 0 4 variance dominates most previous models estimating alternative specifications explains earlier breakdowns showing the model s distinctive features to be important in accounting for the data

reconsidering the moral hazard risk avoidance tradeoff the received model for optimal demand side cost sharing trades off moral hazard and risk avoidance this model appears to lie behind recent increases in initial cost sharing such as those embodied in health savings accounts and health reimbursement accounts at the same time there is evidence that lower cost sharing for certain drugs can reduce future total health care costs and or improve future health and this may be true of other medical services as well to the degree that individuals remain in the same common insurance pool lower cost sharing that induces increases in certain services that reduce total costs including future costs represents a classic case for a subsidy and will minimize an employer s labor costs even if total costs increase the value of a change in health could increase more in that case such a subsidy is consistent with recent work in behavioral economics for those with self control problems

the rand health insurance experiment three decades later we re present and re examine the analysis from the famous rand health insurance experiment from the 1970s on the impact of consumer cost sharing in health insurance on medical spending we begin by summarizing the experiment and its core findings in a manner that would be standard in the current age we then examine potential threats to the validity of a causal interpretation of the experimental treatment effects stemming from different study participation and differential reporting of outcomes across treatment arms finally we re consider the famous rand estimate that the elasticity of medical spending with respect to its out of pocket price is 0 2 emphasizing the challenges associated with summarizing the experimental treatment effects from non linear health insurance contracts using a single price elasticity

health insurance and the demand for medical care evidence from a randomized experiment we estimate how cost sharing the portion of the bill the patient pays affects the demand for medical services the data come from a randomized experiment a catastrophic insurance plan reduces expenditures 31 percent relative to zero out of pocket price the price elasticity is approximately 0 2 we reject the hypothesis that less favorable coverage of outpatient services increases total expenditure for example by deterring preventive care or inducing hospitalization

inflation risk and the speed of adjustment in short run money demand functions abstract after 1973 money demand functions show a slow speed of adjustment including inflation risk does not help this the ser shows multiple minima as a function of the estimated rho in the error with higher speeds and rhos associated

innovation and the welfare effects of public drug insurance rewarding inventors with inefficient monopoly power has long been regarded as the price of encouraging innovation prescription drug insurance escapes that trade off and achieves an elusive goal lowering static deadweight loss without reducing incentives for innovation as a result of this feature the public provision of drug insurance can be welfare improving even for risk neutral and purely self interested consumers the design of insurers cost sharing schedules can either reinforce or mitigate this result schedules that impose higher consumer cost sharing requirements on more expensive drugs help ensure that insurance subsidies translate into higher utilization rather than pure increases in manufacturer profits moreover some degree of price negotiation with manufacturers is likely to be welfare improving but the optimal degree depends on the size of such transactions costs as well as the social cost of weakening innovation incentives by lowering innovator profits these results have practical implications for the evaluation of public drug insurance programs like the us medicaid and medicare part d programs along with european insurance schemes

optimal sin taxes abstract we investigate sin taxes on unhealthy items such as fatty foods that people may by their own reckoning consume too much of we employ a standard optimal taxation framework but replace the standard assumption that all consumers have 100 self control with an assumption that some consumers may have some degree of self control problems we show that imposing taxes on unhealthy items and returning the proceeds to consumers can generally improve total social surplus because such taxes counteract over consumption by consumers with self control problems while at the same time they naturally redistribute income to consumers with no self control problems who consume less such taxes can even create pareto improvements finally we demonstrate with some simple numerical examples that even if the population exhibits relatively few self control problems optimal taxes can still be large

discovering the link between inflation rates and inflation uncertainty a new time series model is used to reassess the strength of the link between inflation uncertainty and the level of inflation in the united states the model provides several statistical measures that can be used to examine different aspects of uncertainty the main finding is that uncertainty about the long rather than short term prospects for inflation moved strongly with the rate of inflation since the early 1970s copyright 1991 by ohio state university press

health insurance for humans information frictions plan choice and consumer welfare traditional models of insurance choice are predicated on fully informed and rational consumers protecting themselves from exposure to financial risk in practice choosing an insurance plan is a complicated decision often made without full information in this paper we combine new administrative data on health plan choices and claims with unique survey data on consumer information to identify risk preferences information frictions and hassle costs our additional friction measures are important predictors of choices and meaningfully impact risk preference estimates we study the implications of counterfactual insurance allocations to illustrate the importance of distinguishing between these micro foundations for welfare analysis

cointegration and unit roots this paper provides an updated survey of a burgeoning literature on testing estimation and model specification in the presence of integrated variables integrated variables are a specific class of non stationary variables which seem to characterise faithfully the properties of many macroeconomic time series the analysis of cointegration develops out of the existence of unit roots and offers a generic route to test the validity of the equilibrium predictions of economic theories special emphasis is put on the empirical researcher s point of view

beyond revealed preference choice theoretic foundations for behavioral welfare economics we propose a broad generalization of standard choice theoretic welfare economics that encompasses a wide variety of nonstandard behavioral models our approach exploits the coherent aspects of choice that those positive models typically attempt to capture it replaces the standard revealed preference relation with an unambiguous choice relation roughly x is strictly unambiguously chosen over y written xp y iff y is never chosen when x is available under weak assumptions p is acyclic and therefore suitable for welfare analysis it is also the most discerning welfare criterion that never overrules choice the resulting framework generates natural counterparts for the standard tools of applied welfare economics and is easily applied in the context of specific behavioral theories with novel implications though not universally discerning it lends itself to principled refinements

generic existence of completely revealing equilibria for economies with uncertainty when prices convey information conditions which imply the existence of strict rational expectations equilibria for most static pure exchange economies where prices convey information about the state of the world are analyzed information is aggregated and transmitted by prices because agents have different initial information and maximize the conditional expectation of state dependent utility functions major results state that if with probability one agents characteristics do not vary too much as the state of the world varies then generically there exist equilibrium price functions which reveal all initial information more precisely if the support of the image measure is contained in a compact c1 manifold satisfying some technical conditions which is of sufficiently low dimension relative to the number of commodities then existence of completely revealing equilibria is generic any economy satisfying these assumptions can be approximated by a sequence of economies which also obey these assumptions and have completely revealing equilibrium price functions slight perturbations do not destroy the existence property

a model of focusing in economic choice we present a generally applicable theory of focusing based on the hypothesis that a person focuses more on and hence overweights attributes in which her options dier more our model predicts that the decisionmaker is too prone to choose options with concentrated advantages relative to alternatives but maximizes utility when the advantages and disadvantages of alternatives are equally concentrated in intertemporal choice because the relative concentrations of an option s costs and benets can be dierent from the perspective of a single period and the perspective of the entire choice problem the decisionmaker often exhibits a form of time inconsistency she is present biased when the costs of current misbehavior are distributed over many future dates such as in harmful consumption but future biased when the benet of many

perfect competition in markets with adverse selection this paper proposes a perfectly competitive model of a market with adverse selection prices are determined by zero profit conditions and the set of traded contracts is determined by free entry crucially for applications contract characteristics are endogenously determined consumers may have multiple dimensions of private information and an equilibrium always exists equilibrium corresponds to the limit of a differentiated products bertrand game we apply the model to establish theoretical results on the equilibrium effects of mandates mandates can increase efficiency but have unintended consequences with adverse selection an insurance mandate reduces the price of low coverage policies which necessarily has indirect effects such as increasing adverse selection on the intensive margin and causing some consumers to purchase less coverage

overconfidence insurance and paternalism it is well known that when agents are fully rational compulsory public insurance may make all agents better off in the rothschild and stiglitz 1976 model of insurance markets we find that when sufficiently many agents underestimate their personal risks compulsory insurance makes low risk agents worse off hence behavioral biases may weaken some of the well established rationales for government intervention based on asymmetric information

money demand during hyperinflation and stabilization bulgaria 1991 2000 the demand for money in bulgaria is estimated over a ten year period 1991 2000 of high inflation and inflation uncertainty the paper distinguishes between three well defined sub periods high variable but not systematically accelerating inflation from 1991 until april 1996 the near hyperinflation period from may 1996 to february 1997 and the subsequent stabilization after the adoption of a currency board the empirical analysis utilizes a standard methodology of cointegration and error correction the functional determinants of the demand for money change during the different sub periods during the hyperinflation episode cagan s model is employed

patient cost sharing and hospitalization offsets in the elderly in the medicare program increases in cost sharing by a supplemental insurer can exert financial externalities we study a policy change that raised patient cost sharing for the supplemental insurer for retired public employees in california we find that physician visits and prescription drug usage have elasticities that are similar to those of the rand health insurance experiment hie unlike the hie however we find substantial offset effects in terms of increased hospital utilization the savings from increased cost sharing accrue mostly to the supplemental insurer while the costs of increased hospitalization accrue mostly to medicare

how are preferences revealed revealed preferences are tastes that rationalize an economic agent s observed actions normative preferences represent the agent s actual interests it sometimes makes sense to assume that revealed preferences are identical to normative preferences but there are many cases where this assumption is violated we identify five factors that increase the likelihood of a disparity between revealed preferences and normative preferences passive choice complexity limited personal experience third party marketing and intertemporal choice we then discuss six approaches that jointly contribute to the identification of normative preferences structural estimation active decisions asymptotic choice aggregated revealed preferences reported preferences and informed preferences each of these approaches uses consumer behavior to infer some property of normative preferences without equating revealed and normative preferences we illustrate these issues with evidence from savings and investment outcomes

integrated insurance design in the presence of multiple medical technologies the classic theory of moral hazard concerns the insurance of a single good and predicts that co insurance is larger when the elasticity of demand is higher and when small risks are insured we extend this analysis to the insurance of multiple goods for example the simultaneous insurance of medical services and prescription drugs we show that when multiple goods are either complements or substitutes so that a change in co insurance for one service affects the demand of others the classic moral hazard results do not hold for example the single good model would predict high co payments for prescription drugs since drug demand is elastic and of modest financial risk however a model of multi good insurance suggests such drug coverage may optimally involve zero or even negative co insurance when it is a substitute to other services insured such as hospital care or physician services we summarize some of the empirical evidence in support of markets adopting optimal integrated pricing structures rather than individually optimal pricing structures this abstract was borrowed from another version of this item

the effect of inertia on brand name versus generic drug choices abstract consumers tendency to repurchase products is called inertia this study investigates inertia in brand name and generic drug choices which is manifested by the slow and limited adoption of generic drugs despite their lower prices we use claims data from japan and focus on the generic entry of a widely prescribed lipid lowering drug pitavastatin observing the periods before and after the generic entry gives us a unique opportunity to identify the effect of inertia we construct a choice model that incorporates price heterogeneous brand preferences and inertia to quantify each component s magnitude we find that both inertia and heterogeneity in brand preferences have substantial effects counterfactual simulations suggest that a nudging policy that removes inertia from previous brand name users such as by alerting the patients to switch to cheaper generic drugs may have substantial effects and enable patients to choose optimally

money demand during hyperinflation and stabilization bolivia 1980 1988 i introduction the stability of demand for money equations has been at issue in both econometric research and policy analysis the academic debates about the relative merits of the traditional buffer stock and the error correction models of demand for money have centered on parameter stability 1 in policy discussion the scope for remonetization following stabilization depends on the upward shift in the demand for money and the consequent predictability of higher money demand with lower rates of inflation 2 only an increased demand for money would make further credit expansion non inflationary inflation uncertainty has a pervasive effect in the money price nexus high inflation uncertainty makes money a riskier asset depressing the demand for money on a long term and possibly short term basis this impact on the demand for money means that policies influencing inflation will have an additional effect through their impact on inflation uncertainty as well as on expected inflation this paper examines the role of inflation uncertainty in a dramatic case study bolivia during the 1980s this was a decade of extreme macroeconomic instability annual inflation rates reached over 20 000 percent motivating a subsequent stabilization which drove annual inflation rates down to less than 25 percent where they have remained for more than five years perhaps more than any other country in recent history bolivia has undergone a dramatic structural shift in its macroeconomic policy regime to what extent did the demand for money shift during this period in its sensitivity to expected inflation inflation uncertainty and to underlying monetary disequilibria as the inflation stabilization progressed how fast did the money demand parameters react to this new regime change was there scope for remonetization in bolivia following the now famous stabilization plan of august 1985 the new economic plan introduced by president victor paz estenssoro 3 previous literature on the demand for money has explored the role of inflation uncertainty with ambiguous results 4 klein 1977 observed that inflation rate uncertainty reduced the average and marginal productivity of real cash balances in providing monetary services effectively a greater volume of real cash balances is required to obtain the same quality adjusted level of cash balances while the impact on the demand for money is theoretically uncertain because the income and substitution effects work in opposite directions klein provided empirical evidence that inflation uncertainty measured by a moving five year variance around a moving ten year trend with data from 1880 to 1972 actually increased the demand for money in the united states around the same time boonekamp 1978 presented a two period mean variance model of money and bond demand highlighting the potential importance of a hedging role in the demand for money in the face of inflation uncertainty related to aspects of both of these two approaches and working with a capital asset pricing model capm sweeney 1988 drew on university of michigan survey data on inflationary expectations to resolve the theoretical ambiguity of the impact of inflation uncertainty his results based on post war quarterly u s data contrasted with those of klein by showing a negative impact of inflation uncertainty on money demand in his study of the demand for money in the six hyperinflations originally examined by cagan 1956 khan 1977 measured inflation uncertainty by the absolute value of the change in inflation his model assumed that inflation uncertainty would affect the demand for money not directly but by altering the adaptive expectations parameter in the adjustment of inflation expectations his empirical estimates implied a negative impact of inflation uncertainty on the demand for money during accelerating inflation engle 1982 introduced the concept of arch autoregressive conditional heteroskedastic models with a specific application to inflation expectations

optimal health insurance for prevention and treatment this paper reexamines the efficiency based arguments for optimal health insurance extending the classic analysis to consider optimal coverage for prevention and treatment separately our paper considers the tradeoff between individuals risk reduction on the one hand and both ex ante and ex post moral hazard on the other we demonstrate that it is always desirable to offer at least some insurance coverage for preventive care if individual consumers ignore the impact of their preventive care on the health premium using a utility based framework we reconfirm the conventional tradeoff between risk avoidance by risk sharing and moral hazard for insuring treatment goods uncompensated losses that reduce effective income provide a new efficiency based argument for more generous insurance coverage for prevention and treatment of health conditions the optimal coinsurance rates for prevention and for treatment are not identical

credibility and stabilization the paper deals with stabilization as a one shot problem to ask what credibility means in a world where programs will succeed with probability one a model is spelled out where the equilibrium program has some ex ante probability of failure the model draws attention to the factors that raise or lower the probability of success of a stabilization program and thus offers a positive theory of stabilization reputation that emerges as a central element in repeated games has no role in this model