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Information Frictions and Adverse Selection: Policy Interventions in Health Insurance Markets - REVISED - (with Ben Handel and Jon Kolstad)

Abstract: Despite evidence that many consumers in health insurance markets are subject to information frictions, leading to sub-optimal plan choices, approaches used to evaluate these markets typically assume informed, active consumers. This gap between actual behavior and modeling assumptions has important consequences for the positive and normative impacts of key policies, such as (i) those designed to combat adverse selection and (ii) those designed to combat poor choices. We develop a general framework to study insurance market equilibrium and evaluate policy interventions in the presence of choice frictions. We identify sufficient relationships between the underlying distributions of consumer (i) costs, (ii) surplus from risk protection and (iii) choice frictions that determine whether friction-reducing policies will be on net welfare increasing, due to improved consumer matching, or welfare reducing, due to increased adverse selection. We show that the impact of insurer risk-adjustment transfers, a supply-side policy designed to combat adverse selection, depends crucially on how effective consumer choices are, and is generally complementary to choice-improving policies. We implement our approach empirically, show how these key sufficient objects can be measured in practice, and illustrate the theoretically-motivated link between these objects and key policy outcomes.

The Optimal Timing of Unemployment Benefits: Theory and Evidence from Sweden - REVISED - (with Jonas Kolsrud, Camille Landais and Peter Nilsson) - Slides

Abstract: This paper provides a simple, yet robust framework to evaluate the time profile of benefits paid during an unemployment spell. We derive sufficient-statistics formulae capturing the marginal insurance value and incentive costs of unemployment benefits paid at different times during a spell. Our approach allows us to revisit separate arguments for inclining or declining profiles put forward in the theoretical literature and to identify welfare-improving changes in the benefit profile that account for all relevant arguments jointly. For the empirical implementation, we use administrative data on unemployment, linked to data on consumption, income and wealth in Sweden. First, we exploit duration-dependent kinks in the replacement rate and find that, if anything, the moral hazard cost of benefits is larger when paid earlier in the spell. Second, we find that the drop in consumption affecting the insurance value of benefits is large from the start of the spell, but further increases throughout the spell. In trading off insurance and incentives, our analysis suggests that the flat benefit profile in Sweden has been too generous overall. However, both from the insurance and the incentives side, we find no evidence to support the recent introduction of a declining tilt in the profile.

Inferring Risk Perceptions and Preferences using Choice from Insurance Menus: Theory and Evidence - REVISED - (with Keith Ericson, Philipp Kircher and Amanda Starc)

Abstract: 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.

Work in Progress

The Perception of Employment Prospects over the Spell of Unemployment (with A. Mueller and G. Topa)

Risk-based Selection in Unemployment Insurance: Evidence and Implications (with C. Landais, A. Nekoei, P. Nilsson and D. Seim)

Designing Retirement Benefits: Theory and Evidence from Sweden (with J. Kolsrud and C. Landais)

Unemployment Policy and the Long-Term Impact of Job Loss (with C. Landais)

Current Courses Taught

Public Economics (PhD, LSE course, ec534)
Public Economics (MSc, LSE course, ec426)
Public Economics (MPA, LSE course, ec410)
Introductory Microeconomics (Summer, LSE course, ec101)

Press Coverage/Other Writings

"Hard cash or a secure job - which is better?" featured in Financial Times (February 7, 2009) (link)
"The Role of Commitment" comment on "On the interaction between subsidiarity and interpersonal solidarity" by Jacques Dreze (link)
"En als we langdurig werklozen meer zouden betalen?" Op-ed in De Morgen (February 12, 2012) (link)
"De ivoren toren van economen is een mythe" Op-ed in De Standaard (August 3, 2013) (link)
"De mythe van de hangmat" Op-ed in De Standaard (May 15, 2014) (link)