Demand Heterogeneity in Insurance Markets: Implications for Equity and Efficiency
In many markets insurers are barred from price discrimination based on consumer characteristics like age, gender, and medical history. In this paper, I build on a recent literature to show why such policies are inefficient if consumers differ in their willingness-to-pay for insurance conditional on the insured losses they generate. Using administrative claims data, I then show that this type of demand heterogeneity is empirically relevant in a consumer health plan setting. Younger and older consumers and men and women reveal strikingly different demand for health insurance, conditional on their objective medical spending risk. This implies that these groups must face different prices in order to sort themselves efficiently across insurance contracts. The theoretical and empirical analysis highlights a fundamental tradeoff between equity and efficiency that is unique to selection markets.
-
-
Copy CitationMichael Geruso, "Demand Heterogeneity in Insurance Markets: Implications for Equity and Efficiency," NBER Working Paper 22440 (2016), https://doi.org/10.3386/w22440.Download Citation
-
Published Versions
Michael Geruso, 2017. "Demand heterogeneity in insurance markets: Implications for equity and efficiency," Quantitative Economics, vol 8(3), pages 929-975. citation courtesy of 
Related
Working Groups
More from the NBER
In addition to working papers, the NBER disseminates affiliates’ latest findings through a range of free periodicals—the NBER Reporter, the NBER Digest, the Bulletin on Health, the Bulletin on the Economics of Alzheimer's, and the Bulletin on Entrepreneurship—as well as research spotlights, lectures, and panel videos.
