Measuring Ex-Ante Welfare in Insurance Markets

Citation:

Hendren, Nathaniel. Working Paper. “Measuring Ex-Ante Welfare in Insurance Markets”.
Paper1.38 MB
Slides3.64 MB

Abstract:

The willingness to pay for insurance captures the value of insurance against only the risk that remains when choices are observed. This paper develops tools to measure the ex-ante expected utility impact of insurance subsidies and mandates when choices are observed after some insurable information is revealed. The approach retains the transparency of using reduced-form willingness to pay and cost curves. But, it requires an additional sufficient statistic: the difference in marginal utilities between insured and uninsured. I provide an estimation approach to estimate this statistics that uses only reduced-form willingness to pay and cost curves, combined with either (i) a measure of risk aversion or (ii) the reduction in variance of out of pocket expenditures generated by insurance. I apply the approach using existing willingness to pay and cost curve estimates from the low-income health insurance exchange in Massachusetts. Ex-ante optimal insurance prices are roughly 30% lower than prices that maximize market surplus. Mandates can increase expected utility despite increasing deadweight loss. 

Last updated on 09/23/2018