A Behavioral Decomposition of Willingness to Pay for Health Insurance

Tinbergen Institute Discussion Paper 2019-077/I

46 Pages Posted: 2 Dec 2019

See all articles by Aurelien Baillon

Aurelien Baillon

affiliation not provided to SSRN

Aleli D. Kraft

University of the Philippines (Quezon City) - School of Economics

Owen O'Donnell

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Kim van Wilgenburg

Erasmus University Rotterdam (EUR)

Date Written: September 6, 2019

Abstract

Despite widespread exposure to substantial medical expenditure risk in low-income populations, health insurance enrollment is typically low. This is puzzling from the perspective of expected utility theory. To help explain it, this paper introduces a decomposition of the stated willingness to pay (WTP) for insurance into its fair price and three behavioral deviations from that price due to risk perception and risk attitude consistent with prospect theory, plus a residual. To apply this approach, we elicit WTP, subjective distributions of medical expenditures and risk attitude (utility curvature and probability weighting) from Filipino households in a nationwide survey. We find that the mean stated WTP of the uninsured is less than both the actuarially fair price and the subsidized price at which public insurance is offered. This is not explained by downwardly biased beliefs: both the mean and the median subjective expectation are greater than the subsidized price. Convex utility in the domain of losses pushes mean WTP below the fair price and the subsidized price, and the transformation of probabilities into decision weights depresses the mean further, at least using one of two specific decompositions. WTP is reduced further by factors other than risk perception and attitude.

Keywords: Health insurance, willingness to pay, subjective probability, prospect theory, medical expense

JEL Classification: I13, D84

Suggested Citation

Baillon, Aurelien and Kraft, Aleli D. and O'Donnell, Owen and van Wilgenburg, Kim, A Behavioral Decomposition of Willingness to Pay for Health Insurance (September 6, 2019). Tinbergen Institute Discussion Paper 2019-077/I, Available at SSRN: https://ssrn.com/abstract=3488634 or http://dx.doi.org/10.2139/ssrn.3488634

Aurelien Baillon (Contact Author)

affiliation not provided to SSRN

Aleli D. Kraft

University of the Philippines (Quezon City) - School of Economics

Philippines

Owen O'Donnell

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Kim Van Wilgenburg

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

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