Unobserved Heterogeneity, State Dependence, and Health Plan Choices

39 Pages Posted: 19 Jul 2021 Last revised: 23 Apr 2025

See all articles by Ariel Pakes

Ariel Pakes

Harvard University; National Bureau of Economic Research (NBER)

Jack R. Porter

University of Wisconsin-Madison - Social Science Computing Cooperative

Mark Shepard

Harvard University - Harvard Kennedy School (HKS)

Sophie Calder-Wang

University of Pennsylvania - The Wharton School

Date Written: July 2021

Abstract

We provide a new method to analyze discrete choice models with state dependence and individual-by-product fixed effects and use it to analyze consumer choices in a policy-relevant environment (a subsidized health insurance exchange). Moment inequalities are used to infer state dependence from consumers’ switching choices in response to changes in product attributes. We infer much smaller switching costs on the health insurance exchange than is inferred from standard logit and/or random effects methods. A counterfactual policy evaluation illustrates that the policy implications of this difference can be substantive.

Suggested Citation

Pakes, Ariel and Porter, Jack R. and Shepard, Mark and Calder-Wang, Sophie, Unobserved Heterogeneity, State Dependence, and Health Plan Choices (July 2021). NBER Working Paper No. w29025, Available at SSRN: https://ssrn.com/abstract=3889131

Ariel Pakes (Contact Author)

Harvard University ( email )

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jack R. Porter

University of Wisconsin-Madison - Social Science Computing Cooperative ( email )

Madison, WI 53706
United States

Mark Shepard

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

Sophie Calder-Wang

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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