Limited Attention and the Demand for Health Insurance
36 Pages Posted: 22 Nov 2012 Last revised: 19 Apr 2018
Date Written: March 5, 2018
I model how customers with limited attention choose among health plans. The model predicts people to overweight the premium in their decision and thus underappreciate the value of health insurance. This creates incentives for insurance companies to reduce quality and to hide these shortcomings in the fine print while attracting customers with insufficiently lower premiums. Limited attention can lead customers to choose even dominated alternatives. I show that this bias survives in a competitive market and analyze how it can be mitigated through unbundling and standardization. The consequences of choice complexity 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