Last updated on 01/24/2018
Hendren, Nathaniel. Working Paper. “Measuring Ex-Ante Welfare in Insurance Markets”.
Revealed-preference measures of willingness to pay capture the value of insurance only against the risk that remains when choosing insurance. This paper provides a method to analyze the impact of insurance market policies on ex-ante expected utility, including the value of insurance against any risk realized prior to choosing insurance. The method uses market demand and cost curves, combined with an estimate of the difference in marginal utilities between insured and uninsured. I provide conditions under which the difference in marginal utilities can be estimated using market demand and cost curves combined with a measure of risk aversion. Applying the approach to previous literature in health insurance, I estimate a greater value to insurance subsidies and mandates than previous approaches that measure market surplus or “deadweight loss”.