Price-Linked Subsidies and Health Insurance Markups
Mark Shepard] (2017).
Subsidies in many health insurance programs depend on prices set by competing insurers -- as prices rise, so do subsidies. We study the economics of these "price-linked" subsidies compared to "fixed" subsidies set independently of market prices. We show that price-linked subsidies weaken price competition, leading to higher markups and subsidy costs for the government. The size of the price distortion depends on how demand responds to a change in the "price" of uninsurance, which we estimate in Massachusetts using natural experiments in the subsidized health insurance exchange. Reduced-form calculations suggest prices were 4-11% higher with price-linked subsidies than they would have been with fixed subsidies.
We next analyze the welfare effects of these price changes to see why governments may chose to use price-linked subsidies. We show that that price-linked subsidies make sense only if (1) there is uncertainty about costs/prices, and (2) optimal subsidies increase as prices rise.
We argue that it may be optimal for health insurance subsidies to rise with prices because doing so both indirectly links subsidies to market-wide shocks affecting the cost of "charity care" used by the uninsured and insures consumers against cost risk.
Structural estimation allows us to simulate market equilibria under different policies and cost shocks. Without a cost shock, price-linking increases prices by up to 6% relative to fixed subsidies. For levels of cost uncertainty that are reasonable in a mature market, we find that the losses from higher prices outweigh the benefits of price-linking.
The Welfare Implications of Health Insurance
Anup Malani] (2017).
We analyze the financial value of insurance when individuals have access to credit markets. Loans allow consumers to smooth shocks across time, decreasing the value of the smoothing (across states of the world) provided by insurance. We derive a simple formula for the incremental value of insurance and show how it depends on individual characteristics and the features of available loans. Our central contribution is to derive formulas for aggregate welfare that can be taken to data from typical studies of health insurance. We provide both exact formulas that can be taken to data on the distribution of medical expenditures and income and an approximate formula for aggregate data on medical expenditure. Using the Medical Expenditure Panel Survey we illustrate how the incremental value of insurance is decreasing with access to loans. For consumers in the sickest decile, access to a five-year loan decreases the incremental value of insurance by $338 (6%) on average and $3,433 (36%) for the poorest consumers. We also find that our approximate formula is a reasonable proxy for the exact one in our data.
The Effect of Meeting Rates on Matching Outcomes
[with Simon Weber ] (2017).
We extend the classic matching model of Choo and Siow (2006) to allow for the possibility that rate at which potential partners meet affects their probability of matching. We investigate the implications on estimated match surplus and supermodularity.
How Facebook Can Deepen our Understanding of Behavior in Strategic Settings: Evidence
from a Million Rock-Paper-Scissors Games
John A. List,
Jeff Picel] (2017).
We make use of data from a Facebook application where hundreds of thousands of people played a simultaneous move, zero-sum game -- rock-paper-scissors -- with varying information to analyze whether play in strategic settings is consistent with extant theories. We report three main insights. First, we observe that
most people employ strategies consistent with Nash, at least some of the time. Second, however,
players strategically use information on previous play of their opponents, a non-Nash equilibrium behavior; they are more likely to do so when the expected payoffs for such actions increase. Third, experience matters: players with more experience use information on their opponents more effectively than less experienced players, and are more likely to win as a result. We also explore the degree to which the deviations from Nash predictions are consistent with various non-equilibrium models. We analyze both a level-k framework and an adapted quantal response model. The naive version of each these strategies -- where players maximize the probability of winning without considering the probability of losing -- does better than the standard formulation. While, one set of people use strategies that resemble quantal response, there is another group of people who employ strategies that are close to k1; for naive strategies the latter group is much larger.
How Does Technological Change Affect Quality-Adjusted Prices in Health Care? Evidence from Thousands of Innovations
[with Kris Hult and
Tomas Philipson] (2016).
Medical innovations have improved survival and treatment for many diseases but have simultaneously raised spending on health care.
Many health economists believe that technological change is the major factor driving the growth of the heath care sector. Whether quality has increased as much as spending is a central question for both positive and normative analysis of this sector. This is a question of the impact of new innovations on quality-adjusted prices in health care. We perform a systematic analysis of the impact of technological change on quality-adjusted prices, with over six thousand comparisons of innovations to incumbent technologies.
For each innovation in our dataset, we observe its price and quality, as well as the price and quality of an
incumbent technology treating the same disease.
Our main finding is that an innovation's quality-adjusted prices is higher than the incumbent's for about two-thirds (68%) of innovations.
Despite this finding, we argue that quality-adjusted prices may fall or rise over time depending on how fast prices decline for a given treatment over time.
We calibrate that price declines of 4% between the time when a treatment is a new innovation and the time when it has become the incumbent
would be sufficient to offset the observed price difference between innovators and incumbents for a majority of indications. Using standard duopoly models of price competition for differentiated products, we analyze and assess empirically the conditions under which quality-adjusted prices will be higher for innovators than incumbents. We conclude by discussing the conditions particular to the health care industry that may result in less rapid declines, or even increases, in quality-adjusted prices over time.
Taxation in Matching Markets
[with Scott Duke Kominers] (2014).
What is the impact of taxation in matching markets? In matching
markets, because agents have heterogeneous preferences over
potential partners, welfare depends on which agents are matched
to each other in equilibrium. Taxes in matching markets can
generate inefficiency by changing who is matched to whom, even
if the number of workers at each firm is unaffected. For markets
in which workers refuse to match without a positive wage, higher
taxes decrease match efficiency. However, in marriage markets or
student--college matching markets, where transfers may flow in
either direction, raising taxes may increase match efficiency.
Simulations show that, in matching markets, calculations of
deadweight loss based on the change in taxable income can be
substantially biased in either direction.
When is Equilibrium Agglomeration Efficient?
[with Scott Duke Kominers and
Stephen Morris] (2016).
Both firms and individuals cluster in order to benefit from colocation
-- but when deciding where to locate, they typically do not consider the
spillovers they generate for others. We characterize when spillovers
will lead to agglomeration that is socially optimal. Equilibrium
agglomeration is fully efficient only when spillovers are logarithmic;
more concave spillovers generate over-agglomeration, less concave
spillovers lead to under-agglomeration. Our results show that local
policy cannot achieve first-best clustering.
Cost-saving Technology for Public Good Provision: Strategic Investment Incentives, (2013).
When public goods, such as C02 abatement, are provided
non-cooperatively, the equilibrium provision is affected by the
provision costs of different agents. Agents anticipate these
equilibrium effects and take them into account when deciding how
much to investment in cost saving technology. I analyze the
strategic investment incentives agents face both when investment
is simultaneous and prior to public good provision and in the
absence and presence of technological spillovers. Agents have
incentives to underinvest relative to the private optimum, when
investment is ex-ante; these negative incentives are partially
mitigated by technology spillovers.
A Segregation Metric for a World with Peer Effects, (2013).
A major motivation for investigating segregation is the belief
that peer or neighborhood effects are important for outcomes.
Whether through transmission of information, norms or disease,
people are influenced by their friends and their friends'
friends. I propose a segregation metric that is aligned with
this motivation - it attempts to capture to what extent
individuals are disproportionately exposed to and therefore
influenced by members of a certain group. The influence can be
direct - what fraction of their friends belong to that group -
and indirect - to what extent are their friends influenced by
that group. The metric I propose says that one's exposure to,
for example, black people depends on both the fraction of one's
friends that are black and the exposure to black people of one's
friends: the "social blackness" of a person is a weighted
average of his friends' physical blackness and his friends'
social blackness. The weights depend on how much peer influence
decays with each person that it passes through. It may vary with
the type of information or influence.
To Groupon or Not to Groupon: The Profitability
of Deep Discounts [with Benjamin Edelman and Scott Duke Kominers], Forthcoming
Marketing Letters. 27(39) (2016) (preprint) ▸ Abstract
examine the profitability and implications of online discount
vouchers, a relatively new marketing tool that offers consumers
large discounts when they prepay for participating firmsí goods
and services. Within a model of repeat experience good purchase,
we examine two mechanisms by which a discount voucher service
can benefit affiliated firms: price discrimination and
advertising. For vouchers to provide successful price
discrimination, the valuations of consumers who have access to
vouchers must generally be lower than those of consumers who do
not have access to vouchers. Offering vouchers tends to be more
profitable for firms which are patient or relatively unknown,
and for firms with low marginal costs. Extensions to our model
accommodate the possibilities of multiple voucher purchases and
firm price re-optimization. Despite the potential benefits of
online discount vouchers to certain firms in certain
circumstances, our analysis reveals the narrow conditions in
which vouchers are likely to increase firm profits.
The First Order Approach to Merger Analysis
[with E. Glen Weyl], American
Economics Journal: Microeconomics 5(4) (2013). (preprint) ▸
information local to the premerger equilibrium, we derive
approximations of the expected changes in prices and welfare
generated by a merger. We extend the pricing pressure approach
of recent work to allow for non-Bertrand conduct, adjusting the
diversion ratio and incorporating the change in anticipated
accommodation. To convert pricing pressures into quantitative
estimates of price changes, we multiply them by the merger
pass-through matrix, which (under conditions we specify) is
approximated by the premerger rate at which cost increases are
passed through to prices. Weighting the price changes by
quantities gives the change in consumer surplus.
Discrete Choice Cannot Generate
Demand that is Additively Separable in Own Price [with Scott Duke Kominers], Economics
Letters 116(1) (2012). (preprint) ▸
that in a unit demand discrete choice framework with at least
three goods, demand cannot be additively separable in own price.
This result sharpens the analogous result of Jaffe and Weyl
(2010) in the case of linear demand and has implications for
testing of the discrete choice assumption, out-of-sample
prediction, and welfare analysis.
Price Theory and Merger Guidelines [with
E. Glen Weyl], CPI Antitrust
Chronicle 3(1) (2011). (preprint)
Linear Demand Systems are Inconsistent
with Discrete Choice
E. Glen Weyl],
B. E. Journal of Theoretical Economics 10(1) (Advances) Article
52 (2010). (preprint)
that with more than two options, a discrete choice model cannot
generate linear demand.
Benjamin G. Edelman, Sonia Jaffe, and Scott Duke Kominers. To Groupon or Not To Groupon: New Research on
Voucher Profitability. Harvard Business Review [Blog],
January 12, 2011.