Last updated on 03/04/2018
Hendren, Nathaniel. Working Paper. “Measuring Ex-Ante Welfare in Insurance Markets”.
Revealed-preference measures of willingness to pay (WTP) capture the value of insurance only against the risk that remains when choosing insurance. This paper provides a method to translate observed market WTP and cost curves into an ex-ante value of insurance that can analyze the impact of insurance market policies on ex-ante expected utility. The key additional statistic required is the difference in marginal utilities between insured and uninsured, which generally requires an estimate of risk aversion. Applying the approach to previous literature, I estimate higher values of subsidies and mandates relative to methods based market surplus or "deadweight loss".