Evaluating Consumers' Choices of Medicare Part D Plans: A Study in Behavioral Welfare Economics
We propose new methods to model behavior and conduct welfare analysis in complex environments where some choices are unlikely to reveal preferences. We develop a mixture-of-experts model that incorporates heterogeneity in consumers’ preferences and in their choice processes. We also develop a method to decompose logit errors into latent preferences versus optimization errors. Applying these methods to Medicare beneficiaries’ prescription drug insurance choices suggests that: (1) average welfare losses from suboptimal choices are small, (2) beneficiaries with dementia and depression have larger losses, and (3) policies that simplify choice sets offer small average benefits, helping some people but harming others.
We thank participants at the Conference in Honor of Daniel McFadden held at USC Schaefer on July 28-29, 2017, and the meetings of the Western Economics Association International at the University of Newcastle on Jan. 11-14, 2018, for helpful comments. We particularly thank our discussant Axel Börsch-Supan, as well as Dan McFadden, Cliff Winston, Whitney Newey and Denzil Fiebig, for especially valuable input. Michael P. Keane and Timothy Neal's work on this project was supported by Australian Research Council grants FL110100247 and CE110001029. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Michael Keane & Jonathan Ketcham & Nicolai Kuminoff & Timothy Neal, 2020. "Evaluating consumers’ choices of Medicare Part D plans: A study in behavioral welfare economics," Journal of Econometrics, . citation courtesy of