NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Bunching at the Kink: Implications for Spending Responses to Health Insurance Contracts

Liran Einav, Amy Finkelstein, Paul Schrimpf

NBER Working Paper No. 22369
Issued in June 2016
NBER Program(s):The Program on Aging, The Health Care Program, The Health Economics Program, The Industrial Organization Program, The Labor Studies Program, The Public Economics Program

A large literature in empirical public finance relies on “bunching” to identify a behavioral response to non-linear incentives and to translate this response into an economic object to be used counterfactually. We conduct this type of analysis in the context of prescription drug insurance for the elderly in Medicare Part D, where a kink in the individual’s budget set generates substantial bunching in annual drug expenditure around the famous “donut hole.” We show that different alternative economic models can match the basic bunching pattern, but have very different quantitative implications for the counterfactual spending response to alternative insurance contracts. These findings illustrate the importance of modeling choices in mapping a compelling reduced form pattern into an economic object of interest.

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Document Object Identifier (DOI): 10.3386/w22369

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