Abstracts of Selected Recent NBER Working Papers

NBER Working Paper 13191
Sumit Agarwal, John C. Driscoll, Xavier Gabaix, David Laibson
The Age of Reason: Financial Decisions Over the Lifecycle

The sophistication of financial decisions varies with age: middle-aged adults borrow at lower interest rates and pay fewer fees compared to both younger and older adults. We document this pattern in ten financial markets. The measured effects cannot be explained by observed risk charac-teristics. The sophistication of financial choices peaks around age 53 in our cross-sectional data. Our results are consistent with the hypothesis that financial sophistication rises and then falls with age, although the patterns that we observe represent a mix of age effects and cohort effects.

NBER Working Paper 13301
Joseph J. Doyle, Jr
Returns to Local-Area Health Care Spending: Using Health Shocks to Patients Far From Home

Health care spending varies widely across markets, yet there is little evidence that higher spending translates into better health outcomes, possi-bly due to endogeneity bias. The main innovation in this paper compares outcomes of patients who are exposed to different health care systems that were not designed for them: patients who are far from home when a health emergency strikes. The universe of emergencies in Florida from 1996-2003 is considered, and visitors who become ill in high-spending areas have significantly lower mortality rates compared to similar visitors in lower-spending areas. The results are robust across different types of patients and within groups of destinations that appear to be close demand substitutes.

NBER Working Paper 13304
Mary Beth Landrum, Kate A. Stewart, David M. Cutler
Clinical Pathways to Disability

This paper examines the pathways by which individuals transition from healthy to disabled. Because of the high prevalence and costs associ-ated with disability, understanding these pathways is critical to developing interventions to prevent or minimize disability. We compare two estimates of disabling conditions: those observed in medical claims and conditions indicated by the disabled individual. A small number of conditions explain about half of incident disability: arthritis, infectious disease, dementia, heart failure, diabetes, and stroke. These conditions show up in medical claims and self reports. A large number of elderly also attribute disability to old age and various symptoms. Because so many of the most disabling conditions do not have clear medical treatments, the outlook for major reductions in disability might be limited.

NBER Working Paper 13333
Gary Becker, Kevin Murphy, Tomas Philipson
The Value of Life Near its End and Terminal Care

Medical care at the end of life, which often is estimated to contribute up to a quarter of US health care spending, often encounters skepticism from payers and policy makers who question its high cost and often minimal health benefits. It seems generally agreed upon that medical re-sources are being wasted on excessive care for end-of-life treatments that often only prolong minimally an already frail life. However, though many observers have claimed that such spending is often irrational and wasteful, little explicit and systematic analysis exists on the incentives that determine end of life health care spending. There exists no positive theory that attempts to explain the high degree of end-of-life spending and why differences across individuals, populations, or time occur in such spending. This paper attempts to provide the first rational and sys-tematic analysis of the incentives behind end-of-life care. The main argument we make is that existing estimates of the value of a life year do not apply to the valuation of life at the end of life. We stress the low opportunity cost of medical spending near ones death, the importance of keeping hope alive in a terminal care setting, the larger social value of a life than estimated in private demand settings, as well as the insignifi-cance in quality of life in lowering its value. We derive how an ex-ante perspective in terms of insurance and R&D alters some of these conclu-sions.

NBER Working Paper 13347
Douglas Almond, Lena Edlund, Marten Palme
Chernobyl's Subclinical Legacy: Prenatal Exposure to Radioactive Fallout and School Outcomes in Sweden

Japanese atomic bomb survivors irradiated 8-25 weeks after ovulation subsequently suffered reduced IQ [Otake and Schull, 1998]. Whether these findings generalize to low doses (less than 10 mGy) has not been established. This paper exploits the natural experiment generated by the Chernobyl nuclear accident in April 1986, which caused a spike in radiation levels in Sweden. In a comprehensive data set of 562,637 Swedes born 1983-1988, we find that the cohort in utero during the Chernobyl accident had worse school outcomes than adjacent birth cohorts, and this deterioration was largest for those exposed approximately 8-25 weeks post conception. Moreover, we find larger damage among students born in regions that received more fallout: students from the eight most affected municipalities were 3.6 percentage points less likely to qualify to high school as a result of the fallout. Our findings suggest that fetal exposure to ionizing radiation damages cognitive ability at radiation lev-els previously considered safe.

NBER Working Paper 13358
Baoping Shang, Dana P. Goldman
Prescription Drug Coverage and Elderly Medicare Spending

The introduction of Medicare Part D has generated interest in the cost of providing drug coverage to the elderly. Of paramount importance - often unaccounted for in budget estimates-are the salutary effects that increased prescription drug use might have on other Medicare spending. This paper uses longitudinal data from the Medicare Current Beneficiary Survey (MCBS) to estimate how prescription drug benefits affect Medicare spending. We compare spending and service use for Medigap enrollees with and without drug coverage. Because of concerns about selection, we use variation in supply-side regulations of the individual insurance market - including guaranteed issue and community rating - as instruments for prescription drug coverage. We employ a discrete factor model to control for individual-level heterogeneity that might induce bias in the effects of drug coverage. Medigap prescription drug coverage increases drug spending by $170 or 22%, and reduces Medicare Part A spending by $350 or 13% (in 2000 dollars). Medigap prescription drug coverage reduces Medicare Part B spending, but the estimates are not statistically significant. Overall, a $1 increase in prescription drug spending is associated with a $2.06 reduction in Medicare spending. Fur-thermore, the substitution effect decreases as income rises, and thus provides support for the low-income assistance program of Medicare Part D.

NBER Working Paper 13438
Jeffrey R. Brown
Guaranteed Trouble: The Economic Effects of the Pension Benefit Guaranty Corporation

This paper examines the economic rationale for, historical experience of, and current pressures facing the Pension Benefit Guaranty Corpora-tion (PBGC). The PBGC is the government entity which partially insures participants in private-sector defined benefit pension plans against the loss of pension benefits in the event that the plan sponsor experiences financial distress and has an under-funded pension plan. The paper dis-cusses three major flaws of the PBGC, namely, that the PBGC has: 1) failed to properly price insurance and thus encouraged excessive risk-taking by plan sponsors; 2) failed to promote adequate funding of pension obligations; and 3) failed to promote sufficient information disclo-sure to market participants. The paper then discusses potential ways to reform the PBGC so that it operates more in concert with basic eco-nomic principles.

NBER Working Paper 13539
David Cutler, Winnie Fung, Michael Kremer, Monica Singhal
Mosquitoes: The Long-term Effects of Malaria Eradication in India

We examine the effects of malaria on educational attainment by exploiting geographic variation in malaria prevalence in India prior to a na-tionwide eradication program in the 1950s. Malaria eradication resulted in gains in literacy and primary school completion rates of approxi-mately 12 percentage points. These estimates imply that the eradication of malaria can explain about half of the gains in these measures of edu-cational attainment between the pre- and post-eradication periods in areas where malaria was prevalent. The effects are not present in urban areas, where malaria was not considered to be a problem in the pre-eradication period. The results cannot be explained by convergence across areas. We find gains for both men and women as well as for members of scheduled castes and tribes, a traditionally disadvantaged group.

NBER Working Paper 13585
Jonathan Gruber, David Rodriguez
How Much Uncompensated Care do Doctors Provide?

The magnitude of provider uncompensated care has become an important public policy issue. Yet existing measures of uncompensated care are flawed because they compare uninsured payments to list prices, not to the prices actually paid by the insured. We address this issue using a novel source of data from a vendor that processes financial data for almost 4000 physicians. We measure uncompensated care as the net amount that physicians lose by lower payments from the uninsured than from the insured. Our best estimate is that physicians provide negative uncompensated care to the uninsured, earning more on uninsured patients than on insured patients with comparable treatments. Even our most conservative estimates suggest that uncompensated care amounts to only 0.8% of revenues, or at most $3.2 billion nationally. These results highlight the important distinction between charges and payments, and point to the need for a re-definition of uncompensated care in the health sector going forward.



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