42 Pages Posted: 22 Nov 2012 Last revised: 10 Nov 2016
Date Written: October 6, 2016
I model how customers with limited attention choose among health plans. The model can accommodate several observations regarding plan choice. First, people overweight the premium and thus underappreciate the value of health insurance. Second, insurance companies have a strong incentive to reduce quality and to hide these shortcomings in the fine print while attracting customers with insufficiently lower premiums. Third, customers may choose dominated alternatives. I show how consumer bias can be mitigated through unbundling and standardization. I analyze insurance provision in a competitive equilibrium and discuss how the proposed behavioral effects create a fundamental dilemma for policy makers.
Keywords: Limited Attention, Salience, Focus, Health Insurance, Insurance Demand
JEL Classification: D18, D89, I13, I18
Suggested Citation: Suggested Citation