Abstracts of Selected Recent NBER Working Papers

WP 18977
Janet Currie, W. Bentley MacLeod
Diagnosis and Unnecessary Procedure Use: Evidence from C-Sections

This paper develops and applies a model in which doctors have two dimensions of skill: diagnostic skill and skill performing procedures. Higher procedural skill increases the use of intensive procedures across the board, while better diagnostic skill results in fewer intensive procedures for the low risk, but more for the high risk. Deriving empirical analogues to our theoretical measures for the case of C- section, we show that improving diagnostic skill would reduce C-section rates by 15.8% among the lowest risk, and increase them by 4.7% among the high risk while improving outcomes among all women.

WP 19032
Jingjing Chai, Raimond Maurer, Olivia S. Mitchell, Ralph Rogalla
Exchanging Delayed Social Security Benefits for Lump Sums: Could This Incentivize Longer Work Careers?

Social Security benefits are currently provided as a lifelong benefit stream, though some workers would be willing to trade a portion of their annuity streams in exchange for a lump sum amount. This paper explores whether allowing people to receive a lump sum as a payment for delayed retirement rather than as an addition to their lifetime Social Security benefits might induce them to work longer. We model the factors that influence how people trade off a Social Security stream for a lump sum, and we also examine the consequences of such tradeoffs for work, retirement, and life cycle wellbeing. Our base case indicates that workers given the chance to receive their delayed retirement credit as a lump sum payment would boost their average retirement age by 1.5–2 years. This will interest policymakers seeking to reform the Social Security system without raising costs or cutting benefits, while enhancing the incentives to delay retirement.

WP 19063
Jeffrey R. Brown, Jeffrey R. Kling, Sendhil Mullainathan, Marian V. Wrobel
Framing Lifetime Income

We provide evidence that individuals optimize imperfectly when making annuity decisions, and this result is not driven by loss aversion. Life annuities are more attractive when presented in a consumption frame than in an investment frame. Highlighting the purchase price in the consumption frame does not alter this result. The level of habitual spending has little interaction with preferences for annuities in the consumption frame. In an investment frame, consumers prefer annuities with principal guarantees; this result is similar for guarantee amounts below, at, and above the purchase price. We discuss implications for the retirement services industry and its regulators.

WP 19088
Neeraj Kaushal
How Public Pension Affects Elderly Labor Supply and Well-Being: Evidence from India

We study the effect of a recent expansion in India’s National Old Age Pension Scheme on elderly well-being. Estimates suggest that public pension has a modestly negative effect on the employment of elderly/near elderly men with a primary or lower education but no effect of the employment of similar women. Pension raised family expenditures, lowering poverty, and the effect was smaller on families headed by illiterate persons suggesting lower pension coverage of this most disadvantaged group. Further, households spent most of the pension income on medical care and education. We find some weak evidence that pension raised longevity.

WP 19103
Robin L. Lumsdaine, Rogier J.D. Potter van Loon
Wall Street vs. Main Street: An Evaluation of Probabilities

This paper challenges recent conventional wisdom of a divide between Main Street (the average American consumer) and Wall Street (financial market participants). The views of survey respondents regarding the likelihood of stock index returns exceeding specific thresholds are compared to market views indicated by index options with strikes at analogous thresholds. The econometric specification explicitly addresses some important impediments to using elicited probabilities from survey data. We confirm that Main Street views track Wall Street views, although the association is not one-for one. We find a closer association for those demonstrating a better understanding of the laws of probability.

WP 19105
Janet Currie, Mark Stabile, Lauren E. Jones
Do Stimulant Medications Improve Educational and Behavioral Outcomes for Children with ADHD?

We examine the effects of a policy change in the province of Quebec, Canada which greatly expanded insurance coverage for prescription medications. We show that the change was associated with a sharp increase in the use of Ritalin, a medication commonly prescribed for ADHD, relative to the rest of Canada. We ask whether this increase in medication use was associated with improvements in emotional functioning and short- and long-run academic outcomes among children with ADHD. We find evidence of increases in emotional problems among girls, and reductions in educational attainment among boys. Our results are silent on the effects on optimal use of medication for ADHD, but suggest that expanding medication use can have negative consequences given the average way these drugs are used in the community.

WP 19137
Alan Auerbach, Lorenz Kueng, Ronald Lee
Propagation and Smoothing of Shocks in Alternative Social Security Systems

Even with well-developed capital markets, there is no private market mechanism for trading between current and future generations, so a potential role for public old-age pension systems is to spread economic and demographic shocks among different generations. This paper evaluates the smoothing and propagation of shocks of three pay-as-you-go public pension schemes, based on the actual U.S. and German systems, which vary in the extent to which they rely on tax adjustments versus benefit adjustments to provide annual cash-flow budget balance. Modifying the Auerbach-Kotlikoff (1987) dynamic general-equilibrium overlapping generations model to incorporate realistic patterns of fertility and mortality and shocks to productivity, fertility and mortality, we evaluate the effectiveness of the three public pension systems at spreading the effects of such shocks. We find that the systems, particularly those that rely to some extent on tax adjustments, are effective at spreading fertility and mortality shocks, but that this is not the case for productivity shocks, for which the pension systems actually tend to concentrate the economic impact. These results suggest that both system design and the source of shocks are important factors in determining the potential of public pension arrangements to spread the burden of shocks.

WP 19142
Young Kyung Do, Edward C. Norton, Sallay Stearns, Courtney H. Van Houtven
Informal Care and Caregiver's Health

This study aims to measure the causal effect of informal caregiving on the health and health care use of women who are caregivers, using instrumental variables. We use data from South Korea, where daughters and daughters-in-law are the prevalent source of caregivers for frail elderly parents and parents-in-law. A key insight of our instrumental variable approach is that having a parent-in-law with functional limitations increases the probability of providing informal care to that parent-in-law, but a parent-in-law's functional limitation does not directly affect the daughter-in-law's health. We compare results for the daughter-in-law and daughter samples to check the assumption of the excludability of the instruments for the daughter sample. Our results show that providing informal care has significant adverse effects along multiple dimensions of health for daughter-in-law and daughter caregivers in South Korea.

WP 19149
Martin B. Hackmann, Jonathan T. Kolstad, Amanda E. Kowalski
Adverse Selection and an Individual Mandate: When Theory Meets Practice

We develop a model of selection that incorporates a key element of recent health reforms: an individual mandate. We identify a set of key parameters for welfare analysis, allowing us to model the welfare impact of the actual policy as well as to estimate the socially optimal penalty level. Using data from Massachusetts, we estimate the key parameters of the model. We compare health insurance coverage, premiums, and insurer average health claim expenditures between Massachusetts and other states in the periods before and after the passage of Massachusetts health reform. In the individual market for health insurance, we find that premiums and average costs decreased significantly in response to the individual mandate; consistent with an initially adversely selected insurance market. We are also able to recover an estimated willingness-to-pay for health insurance. Combining demand and cost estimates as sufficient statistics for welfare analysis, we find an annual welfare gain of $335 dollars per person or $71 million annually in Massachusetts as a result of the reduction in adverse selection. We also find evidence for smaller post-reform markups in the individual market, which increased welfare by another $107 dollars per person per year and about $23 million per year overall. To put this in perspective, the total welfare gains were 8.4% of medical expenditures paid by insurers. Our model and empirical estimates suggest an optimal mandate penalty of $2,190. A penalty of this magnitude would increase health insurance to near universal levels. Our estimated optimal penalty is higher than the individual mandate penalty adopted in Massachusetts but close to the penalty implemented under the ACA.

WP 19163
Jason Abaluck, Jonathan Gruber
Evolving Choice Inconsistencies in Choice of Prescription Drug Insurance

We explore choice inconsistency over time within the Medicare Part D Prescription Drug Program. Using the full universe of Part D claims data, we revisit our earlier work on partial data to replicate our results showing large "foregone savings" among Part D enrollees. We also document that this foregone savings increases over time during the first four years of the Part D program. We then develop a rich dynamic structural framework that allows us to mathematically decompose the "foregone welfare" from inconsistent plan choices into components due to demand side factors, supply side factors, and changes in preferences over time. We find that the welfare cost of choice inconsistencies increases over time. Most importantly, we find that there is little improvement in the ability of consumers to choose plans over time; we identify and estimate little learning at either the individual or cohort level over the years of our analysis. Inertia does reduce welfare, but even in a world with no inertia we estimate that substantial welfare losses would remain. We conclude that the increased choice inconsistencies over time are driven by changes on the supply side that are not offset both because of inertia and because non-inertial consumers still make inconsistent choices.

WP 19168
Jeffrey R. Brown, Arie Kapteyn, Erzo F.P. Luttmer, Olivia S. Mitchell
TDecision Complexity as a Barrier to Annuitization

We show that people have difficulty valuing annuities, and this, instead of a preference for lumpsums, helps explain observed low annuity demand. Although the median price at which people are willing to sell an annuity stream is close to the actuarial value, many responses diverge greatly from optimizing behavior. Moreover, people will pay substantially less to buy than to sell annuities. We conclude that boundedly rational consumers adopt "buy low, sell high" heuristics when confronting a complex trade-off. This suggests that many consumers do not make optimizing decisions, underscoring the difficulty of explaining cross-sectional annuity valuation differences using standard models.



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