What Does a Public Option Do? Evidence from California

Abstract

Creating a public firm to compete with private firms is an increasingly debated intervention to address inefficiency in concentrated markets. I develop a mixed oligopoly model with alternative firm objectives and estimate it with consumer-level data from the California insurance exchange, where one-third of consumers have access to a public firm. In the best-fitting model, the public firm places more weight on consumer surplus than producer surplus. Adding a public firm decreases premiums, improves welfare in concentrated markets, and increases surplus the most for disadvantaged subpopulations. Enhancing subsidies for private plans, a leading alternative intervention, increases premiums and reduces welfare.

Keywords: public option, mixed oligopoly, adverse selection, health insurance, ACA

JEL Classification: I11, I13, L51, L88, H51