Working Papers and Works in Progress
How Important Is Price Variation Between Health Insurers?, joing with Stuart Craig and Amanda Starc
Liquidity Constraints and the Value of Insurance, joint with Justin Sydnor.
Team Formation and Performance: Evidence from Healthcare Referral Networks, joint with Leila Agha, Kimberley Geissler, and Jim Rebitzer. NBER Working Paper 24338.
Measuring Time Preferences, joint with Jonathan Cohen, David Laibson, and John Myles White. Revise and resubmit, Journal of Economic Literature. Draft available here.
Inferring Risk Perceptions and Preferences using Choice from Insurance Menus: Theory and Evidence (NBER Working Paper 21797, latest draft available here, with Philipp Kircher, Johannes Spinnewijn, and Amanda Starc). Revise and resubmit, Economic Journal.
Demand for insurance can be driven by high risk aversion or high risk. We show how to separately identify risk preferences and risk types using only choices from menus of insurance plans. Our revealed preference approach does not rely on rational expectations, nor does it require access to claims data. We show what can be learned non-parametrically from variation in insurance plans, offered separately to random cross-sections or offered as part of the same menu to one cross-section. We prove that our approach allows for full identification in the textbook model with binary risks and extend our results to continuous risks. We illustrate our approach using the Massachusetts Health Insurance Exchange, where choices provide informative bounds on the type distributions, especially for risks, but do not allow us to reject homogeneity in preferences.
Delay Functions as the Foundation of Time Preference: Testing for Separable Discounted Utility (NBER Working Paper 21095 , with Jawwad Noor).
Delay functions, which vary timing of rewards but fix the money dimension, can elicit the form of discount functions with minimal assumptions. We present a general theorem that characterizes the set of discount functions and utility indices compatible with any ‘regular’ preference. We provide conditions to test for separable discounted utility (SDU). We elicit individual delay functions for a range of amounts and time horizons. When we impose SDU assumptions, we classify more than half our analysis sample as exponential discounters. However, we reject SDU assumptions for 68% of the sample in favor of magnitude-dependent discounting with time distortion.
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.
Published and Forthcoming Papers
The Impact of Partial-Year Enrollment on the Accuracy of Risk Adjustment Systems: A Framework and Evidence (American Journal of Health Economics, forthcoming. Also NBER Working Paper 23765. Joint with Kimberley Geissler and Benjamin Lubin).
Accurate risk adjustment facilitates healthcare market competition. Risk adjustment typically aims to predict annual costs of individuals enrolled in an insurance plan for a full year. However, partial-year enrollment is common and poses a challenge to risk adjustment, since diagnoses are observed with lower probability when individual is observed for a shorter time. Due to missed diagnoses, risk adjustment systems will underpay for partial-year enrollees, as compared to full-year enrollees with similar underlying health status and usage patterns. We derive a new adjustment for partial-year enrollment in which payments are scaled up for partial-year enrollees’ observed diagnoses, which improves upon existing methods. We simulate the role of missed diagnoses using a sample of commercially insured individuals and the 2014 Marketplace risk adjustment algorithm, and find the expected spending of six-month enrollees is underpredicted by 19%. We then examine whether there are systematically different care usage patterns for partial-year enrollees in this data, which can offset or amplify underprediction due to missed diagnoses. Accounting for differential spending patterns of partial-year enrollees does not substantially change the underprediction for six-month enrollees. However, one-month enrollees use systematically less than one-twelfth the care of full-year enrollees, partially offsetting the missed diagnosis effect.
The Questionable Value of Having a Choice of Levels of Health Insurance Coverage. (Journal of Economic Perspectives 2017). Joint with Justin Sydnor.
A Behavioral Blueprint for Improving Health Care Policy (Behavioral Science & Policy 2017, joint with Loewenstein et al.)
The Affordable Care Act (ACA) dramatically expanded the use of regulated marketplaces in health insurance, but consumers often fail to shop for plans during open enrollment periods. Typically these consumers are automatically reenrolled in their old plans, which potentially exposes them to unexpected increases in their insurance premiums and cost sharing. We conducted a randomized intervention to encourage enrollees in an ACA Marketplace to shop for plans. We tested the effect of letters and e-mails with personalized information about the savings on insurance premiums that they could realize from switching plans and the effect of generic communications that simply emphasized the possibility of saving. The personalized and generic messages both increased shopping on the Marketplace’s website by 23 percent, but neither type of message had a significant effect on plan switching. These findings show that simple “nudges” with even generic information can promote shopping in health insurance marketplaces, but whether they can lead to switching remains an open question.
How Product Standardization Affects Choice: Evidence from the Massachusetts Health Insurance Exchange (joint with Amanda Starc, Journal of Health Economics 2016, Older version: NBER Working Paper 19527).
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.
On the Interaction of Memory and Procrastination: Implications for Reminders,Deadlines and Empirical Estimation (Journal of the European Economic Association, 2017. Older version: NBER Working Paper 20381).
The interaction between present-bias and limited memory can explain why individuals do not act at deadlines and why providing reminders can have large effects. Individuals in my model must choose when and whether to complete a task, but may forget or procrastinate. A calibration exercise shows that assuming perfect memory leads to biased estimates of present-bias because the rate of task completion at the deadline is much lower with imperfect memory. Naïve procrastination explains why individuals do not set up reminders despite large gains to doing so. The model offers guidance for empirical studies of reminders, making a distinction between anticipated and unanticipated reminders: anticipated reminders can induce additional procrastination, lowering both welfare and the probability the task is completed. I then use this framework to show how to optimally set deadlines and time the delivery of reminders to present-biased individuals.
The Size of the LGBT Population and the Magnitude of Anti-Gay Sentiment are Substantially Underestimated (Management Science 2017. Older version: NBER Working Paper 19508, joint with Katherine B. Coffman and Lucas C. Coffman).
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.
- See also Camerer et al.’s replication report for Ericson and Fuster (2011 QJE).
We examine how the articulation of government policy affects behavior. Our experiment compares a government mandate to purchase health insurance to a financially equivalent tax on the uninsured. Participants report their probability of purchasing health insurance under one of the two articulations of the policy. The experiment was conducted in four waves, from December 2011 to November 2012. We document the controversy over the Affordable Care Act’s insurance mandate provision that changed the political discourse during the year. Pre-controversy, 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. After the controversy, the mandate is no more effective than the tax. Our results show that how a policy is articulated affects behavior and that persuasion and public opinion management can help achieve policy objectives at lower cost.
Money Earlier or Later? Simple Heuristics Explain Intertemporal Choices Better Than Delay Discounting Does (Psychological Science 2015; also NBER Working Paper 20948), joint with John Myles White, David Laibson, and Jonathan Cohen
Heuristic models have been proposed for many domains involving choice. We conducted an out-of-sample, cross-validated comparison of heuristic models of intertemporal choice (which can account for many of the known intertemporal choice anomalies) and discounting models. Heuristic models outperformed traditional utility-discounting models, including models of exponential and hyperbolic discounting. The best-performing models predicted choices by using a weighted average of absolute differences and relative percentage differences of the attributes of the goods in a choice set. We concluded that heuristic models explain time-money trade-off choices in experiments better than do utility-discounting models.
We measure provider coverage networks for plans on the Massachusetts health insurance exchange using a two measures: consumer surplus from a hospital demand system and the fraction of population hospital admissions that would be covered by the network. The two measures are highly correlated, and show a wide range of networks available to consumers. We then estimate consumer willingness-to-pay for network breadth, which varies by age. 60-year-olds value the broadest network approximately $1200-1400/year more than the narrowest network, while 30-year-olds value it about half as much. Consumers place additional value on star hospitals, and there is significant geographic heterogeneity in the value of network breadth.
We analyze consumer demand and model the effect of pricing regulation under imperfect competition using data from the Massachusetts health insurance exchange. We identify consumer demand using coarse insurer pricing strategies. There is substantial heterogeneity in preferences by consumer type, with younger consumers twice as price sensitive as older consumers. As a result, older consumers face higher markups over costs. Modified community rating links prices for consumers that differ in both costs and preferences. Constrained prices are not simply the population-weighted average of unconstrained prices, because community rating changes the marginal consumer firms face. Tightening rating regulations transfers resources from low cost to high cost consumers, but also reduces firm profits and increases overall consumer surplus. We use our model to examine other insurance regulations. For instance, minimum loss ratios (designed to limit firm profits) will also alter the transfers between consumers. Moreover, risk adjustment will be insufficient to equalize prices across consumer types, as markups still differ. As a result, without a mandate, the market can unravel due to differences in preferences alone.
The endowment effect is among the best known findings in behavioral economics, and has been used as evidence for theories of reference-dependent preferences and loss aversion. However, a recent literature has questioned the robustness of the effect in the laboratory, as well as its relevance in the field. In this review, we provide a summary of the evidence, and describe recent theoretical developments that can potentially reconcile the different findings, with a focus on expectation-based reference points. We also survey recent work from psychology that provides either alternatives to or refinements of the usual loss aversion explanation. We argue that loss aversion is still the leading paradigm for understanding the endowment effect, but that given the rich psychology behind the effect, a version of the theory that encompasses multiple reference points may be required.
Consumer Inertia and Firm Pricing in the Medicare Part D Prescription Drug Insurance Exchange. AEJ: Economic Policy, February 2014, 6(1): 38-64.
I use the Medicare Part D prescription drug insurance market to examine the dynamics of firm interaction with consumers on an insurance exchange. Enrollment data show that consumers face switching frictions leading to inertia in plan choice, and a regression discontinuity design indicates initial defaults have persistent effects. In the absence of commitment to future prices, theory predicts firms respond to inertia by raising prices on existing enrollees, while introducing cheaper alternative plans. The complete set of enrollment and price data from 2006 through 2010 confirms this prediction: older plans have approximately 10% higher premiums than comparable new plans.
The Massachusetts health care reform provides preliminary evidence on the function of health insurance exchanges and individual insurance markets. We describe the type of products consumers choose and the dynamics of consumer choice. Evidence shows that choice architecture affects choice, including product standardization and the use of heuristics (rules of thumb). In addition, while consumers often choose less generous plans in the exchange than in traditional employer-sponsored insurance, there is considerable heterogeneity in consumer demand, as well as some evidence of adverse selection. We examine the role of imperfect competition between insurers, and document the impact of pricing and product regulation on the level and distribution of premiums. Given our extensive choice data, we synthesize the evidence on the Massachusetts exchange to inform the design and regulation on other exchanges.
We examine heuristic decision rules in consumer choice on health insurance exchanges using data from the Massachusetts Connector. Consumers may have difficulty making optimal choices in a complex environment. The heuristic “choose the cheapest plan” is suggested by the decision context, previous research, and the data: about 20% of enrollees choose the cheapest plan possible. We find evidence of this heuristic in many models, but while heuristics may play a role, preference heterogeneity is also important. Our most flexible models find an insignificant heuristic effect, in part because, holding context fixed, this heuristic is observationally equivalent to extreme price sensitivity.
Substantial evidence suggests that people are loss averse: they weigh losses more heavily than equivalent gains. Yet little is known about the reference point relative to which gains or losses are defined. The most common assumption is that the reference point is given by a person’s current endowment (the status quo). We conduct two experiments that instead provide evidence that a person’s expectations about outcomes determine her reference points. In the first experiment, we endow subjects with an item and randomize the probability they will be allowed to trade it for an alternative. Subjects that have a lower exogenous probability of being able to trade their item (and who therefore expect to keep it) are less likely to choose to trade when such an opportunity arises. This is predicted when reference points are expectation-based, but not when they are determined by the status quo. Our second experiment provides a quantitative measure of the effect of expectations on subjects’ monetary valuation of an item. We randomly assign subjects a high (80%) or low (10%) probability of obtaining an item for free, and then elicit their willingness-to-accept for the item conditional on receiving it. Being in the high probability treatment increases valuation of the item by 20-30%. These results shed light on the circumstances under which loss aversion will affect individual behavior and market outcomes, and reconcile conflicting findings regarding the existence of endowment effects in different settings.
Do individuals have unbiased beliefs, or are they over- or underconfident? This paper documents overconfidence in a domain relevant for many economic decisions: prospective memory (memory for action). I use an incentivized experimental design that is more robust to potential confounds than previous research. Subjects chose between smaller automatic payments and larger payments they had to remember to claim at a six-month delay. In a large sample of college and MBA students at two different universities, subjects make choices that imply a forecast of a 76% claim rate, but only 53% of subjects actually claimed the payment.
We consider how to conduct cost-effectiveness analysis when the social cost of a resource differs from the posted price. From the social perspective, the true cost of a medical intervention is the marginal cost of delivering another unit of a treatment, plus the social cost (deadweight loss) of raising the revenue to fund the treatment. We focus on pharmaceutical prices, which have high markups over marginal cost due to the monopoly power granted to pharmaceutical companies when drugs are under patent. We find that the social cost of a branded drug is approximately one-half the market price when the treatment is paid for by a public insurance plan and one-third the market price for mandated coverage by private insurance. We illustrate the importance of correctly accounting for social costs using two examples: coverage for statin drugs and approval for a drug to treat kidney cancer (sorafenib). In each case, we show that the correct social perspective for cost-effectiveness analysis would be more lenient than researcher recommendations. Request a copy via email
Time discounting for primary rewards, by McClure, S., Ericson, K., Laibson, D., Loewenstein, G., and Cohen, J., Journal of Neuroscience 27:5796-804. 2007.
Previous research involving monetary rewards found that limbic reward-related areas show greater activity when an intertemporal choice includes an immediate reward than when the options include only delayed rewards. In contrast, the lateral prefrontal and parietal cortex (areas commonly associated with deliberative cognitive processes, including future planning) respond to intertemporal choices in general but do not exhibit sensitivity to immediacy. This paper extends these findings to primary rewards (fruit juice or water) and time delays of minutes instead of weeks. Thirsty subjects choose between small volumes of drinks delivered at precise times during the experiment (e.g., 2 ml now vs 3 ml in 5 min). Limbic activation was greater for choices between an immediate reward and a delayed reward than for choices between two delayed rewards. In contrast, the lateral prefrontal cortex and posterior parietal cortex responded similarly whether choices were between an immediate and a delayed reward or between two delayed rewards. Relative activation of the two sets of brain regions predicts actual choice behavior
Other Working Papers
Sophistication and Insurance: Asymmetric Information, the Ability to Game the System, and Prescription Drug Insurance.
In complex insurance contracts, individuals can use sophisticated strategies to avoid out-of-pocket expenses. Sophistication and expected claims are affected by similar factors, creating a systematic positive or negative correlation between them. Depending on this correlation, sophistication can lead to advantageous or adverse selection, and selection may differ between the intensive and extensive margin. Responding to sophistication, insurers may distort contracts by making them excessively simple or complex, to reduce or magnify enrollees’ ability to game the system. I show two sophisticated prescription drug-related behaviors each reduce out-of-pocket prescription drug costs by half and are strongly associated with expected claims.