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American Economic Review: Vol. 103 No. 7 (December 2013)

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Adverse Selection and Inertia in Health Insurance Markets: When Nudging Hurts

Article Citation

Handel, Benjamin R. 2013. "Adverse Selection and Inertia in Health Insurance Markets: When Nudging Hurts." American Economic Review, 103(7): 2643-82.

DOI: 10.1257/aer.103.7.2643

Abstract

This paper investigates consumer inertia in health insurance markets, where adverse selection is a potential concern. We leverage a major change to insurance provision that occurred at a large firm to identify substantial inertia, and develop and estimate a choice model that also quantifies risk preferences and ex ante health risk. We use these estimates to study the impact of policies that nudge consumers toward better decisions by reducing inertia. When aggregated, these improved individual-level choices substantially exacerbate adverse selection in our setting, leading to an overall reduction in welfare that doubles the existing welfare loss from adverse selection.

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Additional Materials

Online Appendix (867.03 KB) | Download Data Set (17.61 MB) | Author Disclosure Statement(s) (87.43 KB)

Authors

Handel, Benjamin R. (U CA, Berkeley)

JEL Classifications

D82: Asymmetric and Private Information; Mechanism Design
G22: Insurance; Insurance Companies; Actuarial Studies
I13: Health Insurance, Public and Private


American Economic Review


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