Bunching at the Kink: Implications for Spending Responses to Health Insurance Contracts

32 Pages Posted: 27 Jun 2016

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)

Paul Schrimpf

University of British Columbia (UBC) - Vancouver School of Economics

Date Written: June 2016

Abstract

A large literature in empirical public finance relies on “bunching” to identify a behavioral response to non-linear incentives and to translate this response into an economic object to be used counterfactually. We conduct this type of analysis in the context of prescription drug insurance for the elderly in Medicare Part D, where a kink in the individual’s budget set generates substantial bunching in annual drug expenditure around the famous “donut hole.” We show that different alternative economic models can match the basic bunching pattern, but have very different quantitative implications for the counterfactual spending response to alternative insurance contracts. These findings illustrate the importance of modeling choices in mapping a compelling reduced form pattern into an economic object of interest.

Suggested Citation

Einav, Liran and Finkelstein, Amy and Schrimpf, Paul, Bunching at the Kink: Implications for Spending Responses to Health Insurance Contracts (June 2016). NBER Working Paper No. w22369. Available at SSRN: https://ssrn.com/abstract=2800878

Liran Einav (Contact Author)

Stanford University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Amy Finkelstein

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

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617-868-7242 (Fax)

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

Paul Schrimpf

University of British Columbia (UBC) - Vancouver School of Economics ( email )

997-1873 East Mall
Vancouver, British Columbia V6T 1Z1
Canada

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