Adverse Selection and Inertia in Health Insurance Markets: When Nudging Hurts
American Economic Review · 2013 · Volume 103 · Issue 7
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.
Keywords
Asymmetric and Private Information, Mechanism Design, Insurance, Insurance Companies, Actuarial Studies, Health Insurance, Public and Private
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