Measuring Ex-Ante Welfare in Insurance Markets


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


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