When Consumers Do Not Make an Active Decision: Dynamic Default Rules and their Equilibrium Effects

Dynamic Defaults

Dynamic defaults for recurring purchases determine what happens to consumers enrolled in a product or service who take no action at a decision point. Consumers may face automatic renewal, automatic switching, or non-purchase defaults. Privately optimal dynamic defaults depend on the contributions of adjustment costs versus psychological factors leading to inaction: both produce inertia under renewal defaults, but differ under non-renewal defaults. Defaults have equilibrium effects on pricing by changing the elasticity of repeat demand. Socially optimal defaults depend on firms’ pricing responses as well; more elastic repeat demand restrains price increases on repeat customers and can reduce inefficient switching.

(Latest draft here. Older: NBER Working Paper 20127).

 

See also discussion in The Incidental Economist.

 

 

When Consumers Do Not Make an Active Decision: Dynamic Default Rules and their Equilibrium Effects

When Consumers Do Not Make an Active Decision: Dynamic Default Rules and their Equilibrium Effects

Dynamic Defaults

Dynamic defaults for recurring purchases determine what happens to consumers enrolled in a product or service who take no action at a decision point. Consumers may face automatic renewal, automatic switching, or non-purchase defaults. Privately optimal dynamic defaults depend on the contributions of adjustment costs versus psychological factors leading to inaction: both produce inertia under renewal defaults, but differ under non-renewal defaults. Defaults have equilibrium effects on pricing by changing the elasticity of repeat demand. Socially optimal defaults depend on firms’ pricing responses as well; more elastic repeat demand restrains price increases on repeat customers and can reduce inefficient switching.

(Latest draft here. Older: NBER Working Paper 20127).

See also discussion in The Incidental Economist.

An individual mandate, or a tax? How policy is articulated matters.

Under the Affordable Care Act, people must buy health insurance  or pay a financial penalty. Framing that policy as a mandate to buy health insurance versus as a tax on not purchasing health insurance can matter.

In Ericson and Kessler (JEBO 2016), we describe the results of a year-long experiment in which a series of participants reported their probability of purchasing health insurance either under a mandate or a financially equivalent tax.

In late 2011 and early 2012, articulating the policy as a mandate, rather than a financially equivalent tax, increased probability of insurance purchase by 10.6 percentage points — an effect comparable to a $1000 decrease in annual premiums. However, the controversy over the Affordable Care Act’s insurance mandate provision that changed the political discourse during the year 2012. We document the rise of this controversy. After the controversy, the mandate is no more effective than the tax.

For more, see:

The Size of the LGBT Population and the Magnitude of Anti-Gay Sentiment are Substantially Underestimated

The Size of the LGBT Population and the Magnitude of Anti-Gay Sentiment are Substantially Underestimated

The Size of the LGBT Population and the Magnitude of Anti-Gay Sentiment are Substantially Underestimated

Measuring sexual orientation, behavior, and related opinions is difficult because responses are biased towards socially acceptable answers. We test whether measurements are biased even when responses are private and anonymous and use our results to identify sexuality-related norms and how they vary. We run an experiment on 2,516 U.S. participants. Participants were randomly assigned to either a “best practices method” that was computer-based and provides privacy and anonymity, or to a “veiled elicitation method” that further conceals individual responses. Answers in the veiled method preclude inference about any particular individual, but can be used to accurately estimate statistics about the population.

Comparing the two methods shows sexuality-related questions receive biased responses even under current best practices, and, for many questions, the bias is substantial. The veiled method increased self-reports of non-heterosexual identity by 65% (p<0.05) and same-sex sexual experiences by 59% (p<0.01). The veiled method also increased the rates of anti-gay sentiment. Respondents were 67% more likely to express disapproval of an openly gay manager at work (p<0.01) and 71% more likely to say it is okay to discriminate against lesbian, gay, or bisexual individuals (p<0.01). The results show non-heterosexuality and anti-gay sentiment are substantially underestimated in existing surveys, and the privacy afforded by current best practices is not always sufficient to eliminate bias. Finally, our results identify two social norms: it is perceived as socially undesirable both to be open about being gay, and to be unaccepting of gay individuals.

Paper available below:

Press Coverage:

Contact me about this study:

How Product Standardization Affects Choice: Evidence from the Massachusetts Health Insurance Exchange

Product Standardization on the Mass. HIX

Product Standardization on the Mass. HIX

Standardization of complex products is touted as improving consumer decisions and intensifying price competition, but evidence on standardization is limited. We examine a natural experiment: the standardization of health insurance plans on the Massachusetts Health Insurance Exchange.

Pre-standardization, firms had wide latitude to design plans. A regulatory change then required firms to standardize the cost-sharing parameters of plans and offer seven defined options; plans remained differentiated on network, brand, and price. Standardization led consumers on the HIX to choose more generous health insurance plans and led to substantial shifts in brands’ market shares.

We decompose the sources of this shift into three effects: price, product availability, and valuation. A discrete choice model shows that standardization changed the weights consumers attach to plan attributes (a valuation effect), increasing the salience of tier. The availability effect explains the bulk of the brand shifts. Standardization increased consumer welfare in our models, but firms captured some of the surplus by reoptimizing premiums. We use hypothetical choice experiments to replicate the effect of standardization and conduct alternative counterfactuals.

Link to Full Working Paper: How Product Standardization Affects Choice: Evidence from the Massachusetts Health Insurance Exchange

 

How Product Standardization Affects Choice: Evidence from the Massachusetts Health Insurance Exchange

How Product Standardization Affects Choice: Evidence from the Massachusetts Health Insurance Exchange

Product Standardization on the Mass. HIX

Product Standardization on the Mass. HIX

Standardization of complex products is touted as improving consumer decisions and intensifying price competition, but evidence on standardization is limited. We examine a natural experiment: the standardization of health insurance plans on the Massachusetts Health Insurance Exchange.

Link to Full Working Paper: How Product Standardization Affects Choice: Evidence from the Massachusetts Health Insurance Exchange

Pre-standardization, firms had wide latitude to design plans. A regulatory change then required firms to standardize the cost-sharing parameters of plans and offer seven defined options; plans remained differentiated on network, brand, and price. Standardization led consumers on the HIX to choose more generous health insurance plans and led to substantial shifts in brands’ market shares.

We decompose the sources of this shift into three effects: price, product availability, and valuation. A discrete choice model shows that standardization changed the weights consumers attach to plan attributes (a valuation effect), increasing the salience of tier. The availability effect explains the bulk of the brand shifts. Standardization increased consumer welfare in our models, but firms captured some of the surplus by reoptimizing premiums. We use hypothetical choice experiments to replicate the effect of standardization and conduct alternative counterfactuals.

The Size of the LGBT Population and the Magnitude of Anti-Gay Sentiment are Substantially Underestimated

The Size of the LGBT Population and the Magnitude of Anti-Gay Sentiment are Substantially Underestimated

The Size of the LGBT Population and the Magnitude of Anti-Gay Sentiment are Substantially Underestimated

The Size of the LGBT Population and the Magnitude of Anti-Gay Sentiment are Substantially Underestimated

Measuring sexual orientation, behavior, and related opinions is difficult because responses are biased towards socially acceptable answers. We test whether measurements are biased even when responses are private and anonymous and use our results to identify sexuality-related norms and how they vary. We run an experiment on 2,516 U.S. participants. Participants were randomly assigned to either a “best practices method” that was computer-based and provides privacy and anonymity, or to a “veiled elicitation method” that further conceals individual responses. Answers in the veiled method preclude inference about any particular individual, but can be used to accurately estimate statistics about the population.

Comparing the two methods shows sexuality-related questions receive biased responses even under current best practices, and, for many questions, the bias is substantial. The veiled method increased self-reports of non-heterosexual identity by 65% (p<0.05) and same-sex sexual experiences by 59% (p<0.01). The veiled method also increased the rates of anti-gay sentiment. Respondents were 67% more likely to express disapproval of an openly gay manager at work (p<0.01) and 71% more likely to say it is okay to discriminate against lesbian, gay, or bisexual individuals (p<0.01). The results show non-heterosexuality and anti-gay sentiment are substantially underestimated in existing surveys, and the privacy afforded by current best practices is not always sufficient to eliminate bias. Finally, our results identify two social norms: it is perceived as socially undesirable both to be open about being gay, and to be unaccepting of gay individuals.

Paper available below:

Press Coverage:

Contact me about this study: