Estimating the Heterogeneous Welfare Effects of Choice Architecture: An Application to the Medicare Prescription Drug Insurance Market

77 Pages Posted: 17 Oct 2016

See all articles by Jonathan Ketcham

Jonathan Ketcham

Arizona State University (ASU) - Marketing Department

Nicolai Kuminoff

Arizona State University (ASU) - Economics Department

Christopher Powers

Centers for Medicare and Medicaid Services

Date Written: October 2016

Abstract

We develop a structural model for bounding welfare effects of policies that alter the design of differentiated product markets when some consumers may be misinformed about product characteristics and inertia in consumer behavior reflects a mixture of latent preferences, information costs, switching costs and psychological biases. We use the model to analyze three proposals to redesign markets for Medicare prescription drug insurance: (1) reducing the number of plans, (2) providing personalized information, and (3) defaulting consumers to cheap plans. First we combine administrative and survey data to determine which consumers make informed enrollment decisions. Then we analyze the welfare effects of each proposal, using revealed preferences of informed consumers to proxy for concealed preferences of misinformed consumers. Results suggest that each policy produces large gains and losses for some consumers, but the menu reduction would unambiguously harm most consumers whereas personalized information would unambiguously benefit most consumers.

Suggested Citation

Ketcham, Jonathan D. and Kuminoff, Nicolai and Powers, Christopher, Estimating the Heterogeneous Welfare Effects of Choice Architecture: An Application to the Medicare Prescription Drug Insurance Market (October 2016). NBER Working Paper No. w22732. Available at SSRN: https://ssrn.com/abstract=2853208

Jonathan D. Ketcham (Contact Author)

Arizona State University (ASU) - Marketing Department ( email )

Tempe, AZ 85287-4106
United States
4809655507 (Phone)

HOME PAGE: http://wpcarey.asu.edu/directory/people/profile.cfm?person=2179827

Nicolai Kuminoff

Arizona State University (ASU) - Economics Department ( email )

Tempe, AZ 85287-3806
United States

Christopher Powers

Centers for Medicare and Medicaid Services ( email )

Building South, Room S3-09-2
Mail Stop S3-02-01
Baltimore, MD 21244-1850
United States

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