Unobserved Heterogeneity, State Dependence, and Health Plan Choices
We provide a new method to analyze discrete choice models with state dependence and individual-by-product fixed effects and use it to analyze consumer choices in a policy-relevant environment (a subsidized health insurance exchange). Moment inequalities are used to infer state dependence from consumers’ switching choices in response to changes in product attributes. We infer much smaller switching costs on the health insurance exchange than is inferred from standard logit and/or random effects methods. A counterfactual policy evaluation illustrates that the policy implications of this difference can be substantive.
We thank Hanbin Yang for truly outstanding research assistance, and Liran Einav, Jeremy Fox, Ben Handel, and Amanda Starc for comments. We also acknowledge the Massachusetts Health Connector (and especially Marissa Woltmann) for help in providing and interpreting the data. We gratefully acknowledge data funding from Harvard’s Lab for Economic Applications and Policy. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.