(Most) Everyone is Above Average: Optimism Bias and Insurance Nonparticipation
41 Pages Posted: 17 Mar 2023
Date Written: March 13, 2023
We explore demand for insurance in a setting where nonparticipation has been com-mon: health insurance. We present a stylized model of insurance demand in which consumers make optimistically-biased assessments about future health outcomes. The standard model would predict participation unless insurance is too costly. Our analysis additionally suggests that households need to have high enough wealth and not be too optimistic to participate. We provide empirical evidence consistent with our model. To proxy for optimism bias, we look at the mismatch between objective and subjective measures of well-being from census survey data.
Keywords: optimism bias, nonparticipation, insurance demand, health insurance
JEL Classification: D81, G22, H51, I11, I13
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