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American Economic Review: Vol. 101 No. 5 (August 2011)

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Unhealthy Insurance Markets: Search Frictions and the Cost and Quality of Health Insurance

Article Citation

Cebul, Randall D., James B. Rebitzer, Lowell J. Taylor, and Mark E. Votruba. 2011. "Unhealthy Insurance Markets: Search Frictions and the Cost and Quality of Health Insurance." American Economic Review, 101(5): 1842-71.

DOI: 10.1257/aer.101.5.1842

Abstract

We analyze the effect of search frictions in the market for commercial health insurance. Frictions increase insurance premiums (enough to transfer 13.2 percent of consumer surplus from fully insured employer groups to insurers—approximately $34.4 billion in 1997); and increase insurance turnover (by 64 percent for the average policy). This rent transfer harms consumers and—when combined with heightened turnover—reduces incentives to invest in future health. We also find that a publicly financed insurance option can improve the efficiency of private insurance markets by reducing search friction induced distortions in pricing and marketing efforts. (JEL D83 G22, I18)

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Authors

Cebul, Randall D. (Case Western Reserve U)
Rebitzer, James B. (Boston U and Levy Economics Institute, Bard College)
Taylor, Lowell J. (Carnegie Mellon U)
Votruba, Mark E. (Case Western Reserve U)

JEL Classifications

D83: Search; Learning; Information and Knowledge; Communication; Belief
G22: Insurance; Insurance Companies
I18: Health: Government Policy; Regulation; Public Health


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