The Behavioral Foundations of Default Effects: Theory and Evidence from Medicare Part D

91 Pages Posted: 11 Jan 2021

See all articles by Zarek Brot-Goldberg

Zarek Brot-Goldberg

University of California, Berkeley - Department of Economics

Timothy J. Layton

Harvard Medical School - Department of Health Care Policy; National Bureau of Economic Research

Boris Vabson

Harvard University - Department of Health Care Policy

Adelina Yanyue Wang

Stanford University

Multiple version iconThere are 2 versions of this paper

Date Written: January 11, 2021

Abstract

We leverage two unique natural experiments to show that, in public drug insurance for the low-income elderly in the U.S., defaults have large and persistent effects on plan enrollment and beneficiary drug utilization. We estimate that when a beneficiary’s default is exogenously changed from one year to the next, over 90% of beneficiaries follow that default. We then develop a general framework for choice under costly cognition that allows for the possibility that either paternalistic defaults that steer consumers to plans that suit them (Thaler and Sunstein 2008) or ‘shocking’ defaults that trigger consumers to make active choices (Carroll et al. 2009) could be optimal. We show that optimal default design depends on a previously-overlooked parameter: The elasticity of active choice propensity with respect to the value of the default. Leveraging variation in the match value of randomly-assigned default plans, we estimate an elasticity close to zero: There is little difference in the probability of active choice between beneficiaries assigned a well-matched default versus beneficiaries assigned a poorly-matched default. We also show that this passivity has real consequences, with beneficiaries assigned poorly-matched defaults experiencing large declines in drug consumption relative to those assigned well-matched defaults. This suggests that any potential welfare gains from an active choice response induced by a poorly-matched default are likely to be small and outweighed by the welfare losses due to reductions in drug consumption among beneficiaries who follow the poorly-matched default. Using a third natural experiment and a structural model of attention, we find that the little active choice that is present in this market appears to be largely random, with two-thirds of the variation in active choice coming from within-beneficiary transitory shocks to attention. Our results show that default rules are an integral part of insurance market design and that beneficiaries are likely to benefit from paternalistic defaults rather than be hurt by them.

Suggested Citation

Brot-Goldberg, Zarek and Layton, Timothy J. and Vabson, Boris and Wang, Adelina Yanyue, The Behavioral Foundations of Default Effects: Theory and Evidence from Medicare Part D (January 11, 2021). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2021-03, Available at SSRN: https://ssrn.com/abstract=3763957 or http://dx.doi.org/10.2139/ssrn.3763957

Zarek Brot-Goldberg (Contact Author)

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

Timothy J. Layton

Harvard Medical School - Department of Health Care Policy ( email )

180 Longwood Ave
Boston, MA 02115
United States

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Boris Vabson

Harvard University - Department of Health Care Policy ( email )

25 Shattuck Street
Boston, MA 02115
United States

Adelina Yanyue Wang

Stanford University ( email )

Stanford, CA 94305
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
10
Abstract Views
105
PlumX Metrics