Estimating Welfare in Insurance Markets Using Variation in Prices

51 Pages Posted: 23 Oct 2008 Last revised: 4 Apr 2015

See all articles by Liran Einav

Liran Einav

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Amy Finkelstein

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Mark Cullen

Yale University - School of Medicine

Date Written: October 2008

Abstract

We show how standard consumer and producer theory can be used to estimate welfare in insurance markets with selection. The key observation is that the same price variation needed to identify the demand curve also identifies how costs vary as market participants endogenously respond to price. With estimates of both the demand and cost curves, welfare analysis is straightforward. We illustrate our approach by applying it to the employee health insurance choices at Alcoa, Inc. We detect adverse selection in this setting but estimate that its quantitative welfare implications are small, and not obviously remediable by standard public policy tools.

Suggested Citation

Einav, Liran and Finkelstein, Amy and Cullen, Mark, Estimating Welfare in Insurance Markets Using Variation in Prices (October 2008). NBER Working Paper No. w14414. Available at SSRN: https://ssrn.com/abstract=1288413

Liran Einav (Contact Author)

Stanford University - Department of Economics ( email )

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Amy Finkelstein

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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Mark Cullen

Yale University - School of Medicine ( email )

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New Haven, CT 06520-8034
United States

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