NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Estimating Welfare in Insurance Markets Using Variation in Prices

Liran Einav, Amy Finkelstein, Mark R. Cullen

NBER Working Paper No. 14414
Issued in October 2008
NBER Program(s):   AG   HC   IO   PE

We show how standard consumer and producer theory can be used to estimate welfare in insurance markets with selection. The key observation is that the same price variation needed to identify the demand curve also identifies how costs vary as market participants endogenously respond to price. With estimates of both the demand and cost curves, welfare analysis is straightforward. We illustrate our approach by applying it to the employee health insurance choices at Alcoa, Inc. We detect adverse selection in this setting but estimate that its quantitative welfare implications are small, and not obviously remediable by standard public policy tools.

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Document Object Identifier (DOI): 10.3386/w14414

Published: The Quarterly Journal of Economics (2010) 125 (3): 877-921. doi: 10.1162/qjec.2010.125.3.877

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