Discussion of
Handel, Kolstad & Spinnewijn
“Information Frictions and Adverse Selection:
Policy Interventions in Health Insurance Markets”
by
Avinash Dixit, Princeton University
“Advances in Price Theory” Conference
Becker-Friedman Institute
December 3-4, 2015
Achievements of paper
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Adverse selection and information frictions
modeled in familiar supply-demand form:
slopes, shifts, rotations of D and MC curves
Continuum, multidimensional heterogeneity
Welfare losses displayed as familiar areas;
helps quantify effects of policies
Interesting finding: complementarity of
policies – informing consumers and making
risk-adjustment transfers to insurers
Limitations of paper
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Only price competition for one fixed contract
(or can compare two), not over offering new
contracts as in R-S.
High-deductible (HDHP) and PPO plan have
same network, but out-of-network copay is
20% for PPO, 30% for HDHP. Therefore PPO
has some option value in face of uncertainty:
how best to meet future health care needs.
Bigger issue for typical EPO vs PPO choice.
Comments
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Moral hazard: risk-adj transfers in practice
based on realized costs, so firms can game
them by reporting riskier codes.
How to model: true vs. reported MC curves?
Question: what is the underlying concept of
equilibrium? Competition with many firms
coexisting, or contestable market (Baumol)?
Relevant for firm’s HR department’s choice
of plan provider(s).
Other policies to cope with
adverse selection
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Uberrima fides: insured must declare all known
relevant facts; if found out concealing any,
insurer can deny claim, void contract.
Investigation only ex post if a claim made, so
low cost. Can greatly reduce non-existence
problem in R-S, get Pareto-better outcome.
Poor/no enforcement in US; stricter in Britain,
even more so in France etc.
General thoughts on
price theory
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Reducing a complex, rich situation to 2 or 3
“sufficient statistics”, ideally in a figure.
Any 2, 3? Can always reduce system to 2, 3
variables by solving remaining equations.
Do IS-LM, int-ext balance qualify? What
about mean-variance frontier?
My opinion: best such variables are pairs of
“canonical conjugates” whose product is part
of Hamiltonian, like price and quantity (or
indexes), position and momentum in physics.
Price theory contd.
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Hides a lot of background modeling,
calculation. Must be judged by results –
Do they improve and simplify our
understanding, and facilitate further use?
Therefore doing price theory is an art.
Doing, expositing research is always an art.
Final aim is to solve puzzles, problems. Don’t
elevate any one method. Keep all in toolbox;
use the one best suited to context.
An illustration
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Puzzle in political economy – why is amount
of money in lobbying very small relative to
value of favors received?
Literature has complex game theory models,
but price theory answer is simple, intuitively
appealing
Schematic supply-demand diagram in market
for political favors:
Illustration contd.
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To explain findings, supply curve
should be:
(1) Low – pols have low opportunity
costs; not much skill at anything else
(2) Highly elastic – large numbers of
people very responsive to its benefits