The Incidence of Adverse Selection: Theory and Evidence from Health Insurance Choices

Michael Geruso, Timothy Layton and Adam Leive

No 31435, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Existing research on selection in insurance markets focuses on how adverse selection distorts prices and misallocates products across people. This ignores the distributional consequences of who pays the higher prices. In this paper, we show that the distributional incidence depends on the correlations between income, expected costs, and insurance demand. We discuss the general implications for the design of subsidies and mandates when policymakers value both equity and efficiency. Then, in an empirical case study of a large employer, we show that the incidence of selection falls on higher-income employees, who are more likely to choose generous health insurance plans.

JEL-codes: D31 D8 D82 H22 I13 (search for similar items in EconPapers)
Date: 2023-07
New Economics Papers: this item is included in nep-com, nep-cta and nep-hea
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