Choice in Insurance Markets: A Pigouvian Approach to Social Insurance Design
Should choice be offered in social insurance programs? The paper presents a conceptual framework that identifies the key forces determining the value of offering choice, reviews some existing evidence on these forces, and aims to guide further empirical research in different in- surance domains. The value of offering choice is higher the larger the variation in individual valuations, but gets reduced by both selection on risk and selection on moral hazard. The imple- mentation of choice-based policies is further challenged by the presence of adverse selection and choice frictions or the obligation to offer basic uncompensated care. These inefficiencies can be seen as externalities, which do not rationalize the absence of providing choice per se, but point to the need for regulatory policies and the potential value of corrective pricing à la Pigou.
This review piece was prepared as a draft for the Annual Review of Economics 2021 edition and feedback is very welcome. We thank Sebastian Ernst for excellent research assistance and gratefully acknowledge support from the ERC (grants # 679704 and # 716485). The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.