Demand Heterogeneity in Insurance Markets: Implications for Equity and Efficiency

Michael Geruso

No 22440, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In many markets insurers are barred from price discrimination based on consumer characteristics like age, gender, and medical history. In this paper, I build on a recent literature to show why such policies are inefficient if consumers differ in their willingness-to-pay for insurance conditional on the insured losses they generate. Using administrative claims data, I then show that this type of demand heterogeneity is empirically relevant in a consumer health plan setting. Younger and older consumers and men and women reveal strikingly different demand for health insurance, conditional on their objective medical spending risk. This implies that these groups must face different prices in order to sort themselves efficiently across insurance contracts. The theoretical and empirical analysis highlights a fundamental tradeoff between equity and efficiency that is unique to selection markets.

JEL-codes: I11 I13 (search for similar items in EconPapers)
Date: 2016-07
New Economics Papers: this item is included in nep-cta, nep-ias and nep-mkt
Note: AG EH PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Published as Michael Geruso, 2017. "Demand heterogeneity in insurance markets: Implications for equity and efficiency," Quantitative Economics, vol 8(3), pages 929-975.

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