Amy Finkelstein: 2012 John Bates Clark Medalist

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Citation Levin, Jonathan, and James Poterba. “Amy Finkelstein: 2012 John Bates Clark Medalist.” Journal of Economic Perspectives 26, no. 4 (November 2012): 171-184. © 2012 by the American Economic Association

As Published http://dx.doi.org/10.1257/jep.26.4.171

Publisher American Economic Association

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Citable link http://hdl.handle.net/1721.1/82879

Terms of Use Article is made available in accordance with the publisher's policy and may be subject to US copyright law. Please refer to the publisher's site for terms of use. Journal of Economic Perspectives—Volume 26, Number 4—Fall 2012—Pages 171–184

Amy Finkelstein: 2012 John Bates Clark Medalist

Jonathan Levin and James Poterba

mmyy FFinkelsteininkelstein isis thethe 20122012 recipientrecipient ofof thethe JohnJohn BatesBates ClarkClark MedalMedal fromfrom tthehe AmericanAmerican EconomicEconomic Association.Association. A notablenotable featurefeature ofof Amy’sAmy’s researchresearch A pprogramrogram iiss tthehe ddedicationedication wwithith wwhichhich sshehe hhasas ppursuedursued hherer ccoreore iinterestsnterests iinn iinsurancensurance marketsmarkets andand healthhealth care.care. SheShe hashas addressed,addressed, withwith newnew insightsinsights atat eacheach tturn,urn, ccentralentral issuesissues suchsuch asas whetherwhether asymmetricasymmetric informationinformation leadsleads toto ineffiineffi cien-cien- cciesies inin insuranceinsurance markets,markets, howhow largelarge socialsocial insuranceinsurance programsprograms affectaffect healthcarehealthcare mmarkets,arkets, aandnd tthehe ddeterminantseterminants ooff iinnovationnnovation iincentivesncentives iinn hhealthealth ccare.are. AAmy’smy’s wworkork iiss pprimarilyrimarily empirical,empirical, butbut itit isis usuallyusually motivatedmotivated byby a deepdeep connec-connec- ttionion toto economiceconomic theory.theory. SheShe hashas designeddesigned empiricalempirical teststests thatthat shedshed lightlight onon ccompetingompeting theoriestheories andand uncovereduncovered datadata patternspatterns thatthat provideprovide thethe startingstarting pointpoint fforor ttheoreticalheoretical developments.developments. ByBy blendingblending theory,theory, problem-appropriateproblem-appropriate empiricalempirical mmethods,ethods, aandnd hhigh-qualityigh-quality aadministrativedministrative ddata,ata, AAmymy hhasas bbeeneen aableble ttoo mmakeake pprogressrogress oonn llong-standingong-standing qquestionsuestions thatthat hhaveave ddefiefi eded easyeasy resolutionresolution andand toto advanceadvance substan-substan- ttiallyially oourur uunderstandingnderstanding ooff tthehe eeconomicsconomics ooff iinsurancensurance mmarketsarkets aandnd tthehe mmarketsarkets fforor hhealthcareealthcare sserviceservices mmoreore ggenerally.enerally. AAmymy waswas bornborn andand grewgrew upup inin NewNew YorkYork City.City. HerHer parents,parents, AlanAlan andand JoanJoan FFinkelstein,inkelstein, areare bothboth biologistsbiologists withwith Ph.D.sPh.D.s fromfrom RockefellerRockefeller University.University. Amy’sAmy’s mmotherother llefteft PolandPoland andand immigratedimmigrated toto thethe UnitedUnited StatesStates withwith herher parentsparents inin 19401940 aatt thethe ageage ofof three.three. Amy’sAmy’s maternalmaternal grandmothergrandmother receivedreceived a Ph.D.Ph.D. inin comparativecomparative lliteratureiterature fromfrom thethe UniversityUniversity ofof WarsawWarsaw inin 1928,1928, whichwhich makesmakes threethree generationsgenerations ofof ddoctorate-holdingoctorate-holding wwomenomen iinn AAmy’smy’s ffamily.amily.

■ JJonathanonathan LevinLevin isis HolbrookHolbrook WorkingWorking ProfessorProfessor ofof ,Economics, StanfordStanford University,University, SStanford,tanford, CCalifornia.alifornia. JamesJames PoterbaPoterba isis MitsuiMitsui ProfessorProfessor ofof Economics,Economics, MassachusettsMassachusetts InstituteInstitute ofof Tech-Tech- nnology,ology, andand PresidentPresident ofof thethe NationalNational BureauBureau ofof EconomicEconomic Research,Research, bbothoth inin Cambridge,Cambridge, MMassachusetts.assachusetts. TTheirheir eemailmail aaddressesddresses aarere [email protected]@stanford.edu aandnd [email protected]@mit.edu. http://dx.doi.org/10.1257/jep.26.4.171. doi=10.1257/jep.26.4.171 172 Journal of Economic Perspectives

AAmymy bbeganegan herher stellarstellar academicacademic careercareer atat thethe BrearleyBrearley SchoolSchool inin NewNew YorkYork CCity.ity. PerhapsPerhaps anticipatinganticipating a futurefuture ofof entertainingentertaining lectureslectures andand seminarseminar presenta-presenta- ttions,ions, sheshe earnedearned pocketpocket moneymoney asas a highhigh schoolschool studentstudent byby workingworking asas a jugglerjuggler aandnd clownclown atat birthdaybirthday parties.parties. Later,Later, asas anan undergraduateundergraduate atat HarvardHarvard College,College, AmyAmy mmajoredajored inin government.government. SheShe alsoalso tooktook a numbernumber ofof economicseconomics classes,classes, however,however, aandnd ccoursesourses bbyy LLarryarry KKatzatz aandnd AAlbertolberto AAlesinalesina pparticularlyarticularly aattractedttracted hherer ttoo tthehe fi eld.eld. WWhenhen AmyAmy receivedreceived a MarshallMarshall ScholarshipScholarship forfor postgraduatepostgraduate studystudy inin thethe UnitedUnited KKingdom,ingdom, sheshe enrolledenrolled inin Oxford’sOxford’s two-yeartwo-year M.Phil.M.Phil. programprogram inin Economics.Economics. SheShe rreceivedeceived herher degreedegree inin 1997.1997. SheShe thenthen returnedreturned toto thethe UnitedUnited StatesStates andand spentspent a yyearear inin WWashington,ashington, D.C.,D.C., workingworking atat tthehe CCouncilouncil oonn EEconomicconomic AAdvisors.dvisors. TThishis eexpe-xpe- rrienceience provedproved formative,formative, asas AmyAmy becamebecame interestedinterested inin insuranceinsurance markets.markets. SheShe alsoalso bbecameecame cconvincedonvinced ofof thethe vvaluealue ooff eeconomicsconomics aafterfter sseeingeeing hhowow tthehe sstafftaff mmembersembers aatt tthehe CCouncilouncil wwereere aableble toto articulatearticulate clearclear frameworksframeworks fforor aanalyzingnalyzing ppolicyolicy ddecisions.ecisions. AAmymy sstartedtarted graduategraduate schoolschool atat thethe MassachusettsMassachusetts InstituteInstitute ofof TechnologyTechnology inin tthehe ffallall ooff 11998.998. SShehe ccompletedompleted hherer ddissertationissertation iinn tthreehree yyears,ears, wworkingorking uundernder tthehe gguidanceuidance ofof JamesJames PPoterba,oterba, JJonathanonathan GGruber,ruber, aandnd JJerryerry HHausman.ausman. DDuringuring hherer ttimeime aass a graduategraduate student,student, sheshe overlappedoverlapped withwith thethe lastlast fi veve winnerswinners ofof thethe ClarkClark Medal:Medal: EEmmanuelmmanuel SSaez,aez, EEsthersther DDuflufl o,o, andand JonathanJonathan LevinLevin werewere fellowfellow Ph.D.Ph.D. students,students, wwhilehile DDaronaron AAcemoglucemoglu aandnd SSusanusan AAtheythey wwereere jjuniorunior ffacultyaculty mmembers.embers. A particularlyparticularly notablenotable eventevent inin Amy’sAmy’s graduategraduate schoolschool careercareer occurredoccurred towardtoward tthehe endend ofof herher secondsecond year,year, inin thethe springspring ofof 2000,2000, whenwhen sheshe metmet HarvardHarvard graduategraduate sstudenttudent BenBen OlkenOlken atat a seminarseminar givengiven byby SteveSteve Levitt.Levitt. AfterAfter a spiritedspirited debatedebate aboutabout LLevitt’sevitt’s conclusions—theconclusions—the seminarseminar waswas onon Levitt’sLevitt’s well-knownwell-known workwork linkinglinking thethe llegalizationegalization ofof abortionabortion inin thethe earlyearly 1970s1970s toto fallingfalling crimecrime ratesrates twotwo decadesdecades later—later— AAmymy pproposedroposed thatthat theythey continuecontinue theirtheir discussiondiscussion overover dinnerdinner thatthat Friday.Friday. BenBen ccounterofferedounteroffered withwith thethe less-romanticless-romantic suggestionsuggestion ofof ThursdayThursday lunch,lunch, but,but, happily,happily, hhee rrecoveredecovered fromfrom tthishis earlyearly courtshipcourtship mistake.mistake. FollowingFollowing inin familyfamily tradition—hertradition—her pparentsarents aalsolso mmetet wwhilehile iinn ggraduateraduate sschool—Amychool—Amy mmarriedarried BBenen iinn 22005.005. AAfterfter receivingreceiving herher Ph.D.Ph.D. fromfrom MITMIT inin 2001,2001, AmyAmy spentspent a yearyear asas a postdoc-postdoc- ttoraloral fellowfellow atat thethe NationalNational BureauBureau ofof EconomicEconomic ResearchResearch (NBER)(NBER) inin Cambridge,Cambridge, wwithith tthehe ssupportupport ooff tthehe NNationalational IInstitutesnstitutes ofof HHealth.ealth. SShehe tthenhen wwasas eelectedlected ttoo tthehe HHarvardarvard SSocietyociety ofof Fellows,Fellows, wherewhere sheshe spentspent threethree yearsyears asas a JuniorJunior Fellow.Fellow. DuringDuring tthishis time,time, sheshe wrotewrote severalseveral inflinfl uentialuential paperspapers onon adverseadverse selectionselection inin insuranceinsurance mmarketsarkets andand onon innovation,innovation, andand quicklyquickly establishedestablished herselfherself asas risingrising starstar inin appliedapplied eeconomics.conomics. AmyAmy returnedreturned toto MITMIT asas a facultyfaculty membermember inin 2005,2005, andand waswas promotedpromoted ttoo ttenureenure ttwowo yyearsears llater.ater. HHerer hhusband,usband, BBen,en, wwhoho wwasas aalsolso a mmemberember ooff tthehe HHarvardarvard SSocietyociety ofof Fellows,Fellows, joinedjoined thethe MITMIT economicseconomics facultyfaculty inin 2008.2008. AmyAmy isis currentlycurrently thethe FFordord ProfessorProfessor ofof EconomicsEconomics atat MIT,MIT, andand sheshe isis alsoalso thethe codirector,codirector, alongalong withwith RajRaj CChettyhetty ofof Harvard,Harvard, ofof thethe NBER’sNBER’s PublicPublic EconomicsEconomics Program.Program. InIn thesethese roles,roles, AmyAmy hhasas ddistinguishedistinguished herselfherself notnot justjust forfor herher researchresearch butbut forfor herher advisingadvising andand profes-profes- ssionalional leadership.leadership. HerHer colleaguescolleagues andand coauthorscoauthors notenote thatthat AmyAmy standsstands outout forfor herher aabundantbundant energy,energy, hherer eenviablenviable oorganizationalrganizational skills,skills, andand herher upbeatupbeat andand warmwarm ssenseense ooff hhumor.umor. HHerer sstudentstudents atat MITMIT hhaveave repeatedlyrepeatedly recognizedrecognized herher forfor herher commitmentcommitment ttoo tteachingeaching aandnd aadvising.dvising. Jonathan Levin and James Poterba 173

Amy Finkelstein

IInn tthehe bbalancealance ofof thisthis essay,essay, wewe describedescribe a numbernumber ofof Amy’sAmy’s keykey researchresearch contri-contri- bbutions,utions, wwithith pparticulararticular emphasisemphasis onon thosethose thatthat wwereere iidentifidentifi eded byby thethe HonorsHonors andand AAwardswards CommitteeCommittee ofof thethe AmericanAmerican EconomicEconomic AssociationAssociation inin herher ClarkClark MedalMedal cita-cita- ttion,ion, aass wwellell aass hherer bbroaderroader ccontributionsontributions toto thethe fi eldeld ofof economics.economics. TableTable 1 providesprovides nnumericalumerical rreferenceseferences ttoo AAmy’smy’s ppapersapers ccitedited iinn tthishis eessay.ssay.

Asymmetric Information in Markets

OOnene recurringrecurring themetheme inin Amy’sAmy’s researchresearch isis howhow asymmetricasymmetric informationinformation inin iinsurancensurance marketsmarkets ccanan aaffectffect tthehe bbehaviorehavior ooff iinsurancensurance bbuyers,uyers, iinsurancensurance ccompa-ompa- nnies,ies, aandnd mmarketarket eequilibrium.quilibrium. HerHer analysesanalyses ofof long-termlong-term carecare insurance,insurance, annuities,annuities, aandnd healthhealth insuranceinsurance havehave helpedhelped toto establishestablish thethe empiricalempirical importanceimportance ofof asym-asym- mmetricetric iinformationnformation inin insuranceinsurance markets,markets, andand alsoalso havehave exploredexplored thethe interactioninteraction bbetweenetween ppublicublic policiespolicies andand privateprivate marketmarket ooutcomes.utcomes. SSimpleimple theoreticaltheoretical modelsmodels predictpredict thatthat thethe losseslosses ofof thosethose withwith greatergreater insur-insur- aancence coveragecoverage shouldshould bebe greatergreater thanthan thosethose withwith lessless coveragecoverage oror nono coveragecoverage atat aall.ll. ThisThis outcomeoutcome ccanan aariserise eeitherither fromfrom sselection,election, ifif iindividualsndividuals whowho areare atat highhigh rriskisk ppurchaseurchase moremore insurance,insurance, oror fromfrom moralmoral hazard,hazard, ifif individualsindividuals whowho purchasepurchase mmoreore iinsurancensurance taketake fewerfewer precautionsprecautions againstagainst loss.loss. PerhapsPerhaps surprisingly,surprisingly, however,however, eempiricalmpirical sstudiestudies ooff iinsurancensurance mmarketsarkets hhaveave nnotot aalwayslways sshownhown a ppositiveositive ccorrelationorrelation bbetweenetween insuranceinsurance coveragecoverage andand subsequentsubsequent loss.loss. Indeed,Indeed, earlyearly studiesstudies ofof autoauto andand 174 Journal of Economic Perspectives

Table 1 Selected Papers by Amy Finkelstein

1. “The Effect of Tax Subsidies to Employer-Provided Supplementary : Evidence from Canada.” 2002. Journal of Public Economics 84(3): 305 –340. 2. “Selection Effects in the Market for Individual Annuities: New Evidence from the United Kingdom,” (with James Poterba). 2002. Economic Journal 112(476): 28 –50. 3. “Minimum Standards, Insurance Regulation and Adverse Selection: Evidence from the Medigap Market.” 2004. Journal of Public Economics 88(12): 2515 – 47. 4. “Static and Dynamic Effects of Health Policy: Evidence from the Vaccine Industry.” 2004. Quarterly Journal of Economics 119(2): 527– 64. 5. “Adverse Selection in Insurance Markets: Policyholder Evidence from the U.K. Annuity Market,” (with James Poterba). 2004. Journal of Political Economy 112(1): 183 –208. 6. “The Interaction of Partial Public Insurance Programs and Residual Private Insurance Markets: Evidence from the U.S. Medicare Program.” 2004. Journal of Health Economics 23(1): 1–24. 7. “Multiple Dimensions of Private Information: Evidence from the Long-Term Care Insurance Market,” (with Kathleen McGarry). 2006. American Economic Review 96(4): 938 –58. 8. “Why is the Market for Long-Term Care Insurance So Small?” (with Jeffrey R. Brown). 2007. Journal of Public Economics 91(10): 1967– 91. 9. “The Aggregate Effects of Health Insurance: Evidence from the Introduction of Medicare.” 2007. Quarterly Journal of Economics 122(3): 1–37. 10. “Input and Technology Choices in Regulated Industries: Evidence from the Health Care Sector,” (with ). 2008. Journal of Political Economy 116(5): 837– 80. 11. “The Interaction of Public and Private Insurance: Medicaid and the Long-Term Care Insurance Market,” (with Jeffrey R. Brown). 2008. American Economic Review 98(3): 1083 –1102. 12. “What Did Medicare Do? The Initial Impact of Medicare on Mortality and Out of Pocket Medical Spending,” (with Robin McKnight). 2008. Journal of Public Economics 92(7): 1644 – 69. 13. “EZ-Tax: Tax Salience and Tax Rates.” 2009. Quarterly Journal of Economics 124(3): 969 –1010. 14. “Redistribution by Insurance Market Regulation: Analyzing a Ban on Gender-Based Retirement Annuities,” (with James Poterba and Casey Rothschild). 2009. Journal of Financial Economics 91(1): 35 – 58.

llifeife iinsurancensurance sshowedhowed llittleittle rrelationship,elationship, rraisingaising tthehe qquestionuestion ooff wwhetherhether aasymmetricsymmetric iinformationnformation waswas anan importantimportant factorfactor inin thesethese markets,markets, andand moremore generallygenerally whetherwhether tthehe cclassiclassic mmodelsodels ooff iinsurancensurance mmarketarket eequilibriumquilibrium uundernder aasymmetricsymmetric iinformationnformation wwereere eempiricallympirically rrelevant.elevant. AAmymy tackledtackled thisthis issueissue inin jointjoint workwork withwith KathleenKathleen McGarryMcGarry [7][7] onon thethe long-long- ttermerm ccareare iinsurancensurance market.market. TTheirheir aanalysisnalysis ppostulatesostulates thatthat potentialpotential insuranceinsurance bbuyersuyers differdiffer onon twotwo dimensions:dimensions: theirtheir riskrisk ofof experiencingexperiencing anan insuredinsured event,event, andand ttheirheir riskrisk aversion.aversion. ForFor a givengiven riskrisk aversionaversion level,level, individualsindividuals withwith greatergreater riskrisk ofof lloss—thatoss—that is,is, withwith a higherhigher probabilityprobability ofof needingneeding long-termlong-term care—shouldcare—should bebe moremore llikelyikely toto purchasepurchase policies.policies. AtAt thethe samesame time,time, forfor a givengiven probabilityprobability ofof loss,loss, indi-indi- vvidualsiduals whowho areare moremore rriskisk aaverseverse sshouldhould bbee moremore llikelyikely ttoo ppurchaseurchase ppolicies.olicies. WWhenhen tthehe twotwo dimensionsdimensions ofof heterogeneityheterogeneity areare bothboth present,present, however,however, whetherwhether oror notnot ppolicyholdersolicyholders willwill experienceexperience a higherhigher raterate ofof claimsclaims isis ambiguous:ambiguous: itit dependsdepends onon tthehe rrelativeelative iimportancemportance oof,f, aandnd tthehe ccorrelationorrelation bbetween,etween, rriskisk aaversionversion aandnd rriskisk ttype.ype. AAmymy aandnd KathleenKathleen exploredexplored thisthis theorytheory usingusing datadata fromfrom thethe AssetAsset andand HealthHealth DDynamicsynamics AmongAmong thethe OldestOldest OldOld (AHEAD)(AHEAD) survey.survey. TheirTheir analysisanalysis showedshowed thatthat Amy Finkelstein: 2012 John Bates Clark Medalist 175

Table 1—continued

15. “The Private Market for Long-Term Care Insurance in the U.S: A Review of the Evidence,” (with Jeffrey R. Brown). 2009. Journal of Risk and Insurance 76(1): 5 –29. 16. “Estimating Welfare in Insurance Markets Using Variation in Prices,” (with Liran Einav and Mark Cullen). 2010. Quarterly Journal of Economics 123(3): 877– 921. 17. “Optimal Mandates and the Welfare Cost of Asymmetric Information: Evidence from the U.K. Annuity Market,” (with Liran Einav and Paul Schrimpf). 2010. Econometrica 78(3): 1031– 92. 18. “Insuring Long-Term Care in the ,” (with Jeffrey R. Brown). 2011. Journal of Economic Perspectives 25(4): 119 – 42. 19. “The Effects of Medicaid Coverage–Learning from the Oregon Experiment,” (with ). 2011. New England Journal of Medicine, published July 20 at NEJM.org. doi: 10.1056/ nejmp1108222. 20. “Selection in Insurance Markets: Theory and Empirics in Pictures,” (with Liran Einav). 2011. Journal of Economic Perspectives 25(1): 115 –38. 21. “Beyond Testing: Empirical Models of Insurance Markets,” (with Liran Einav and Jonathan Levin). 2011. Annual Review of Economics 2: 311–36. 22. “Selection on Moral Hazard in Health Insurance,” (with Liran Einav, Paul Schrimpf, Stephen Ryan, and Mark Cullen). American Economic Review, forthcoming. 23. “The Oregon Health Insurance Experiment: Evidence from the First Year,” (with Sarah Taubman, Bill Wright, Mira Bernstein, Jonathan Gruber, Joseph P. Newhouse, Heidi Allen, Katherine Baicker, and the Oregon Health Study Group). 2012. Quarterly Journal of Economics 127(3): 1057–1106. 24. “How General are Risk Preferences? Choices under Uncertainty in Different Domains,” (with Liran Einav, Iuliana Pascu, and Mark Cullen). American Economic Review 102:(6): 2606 – 38. 25. “Moral Hazard in Health Insurance: How Important is Forward Looking Behavior?” (with Aviva Aron-Dine, Liran Einav, and Mark Cullen). 2012. NBER Working Paper 17802.

iindividuals’ndividuals’ subjectivesubjective assessmentsassessments ofof ffutureuture nnursingursing hhomeome uusese aarere ppredictiveredictive ooff ssubsequentubsequent utilization,utilization, eveneven afterafter controllingcontrolling forfor observableobservable attributesattributes thatthat thethe iinsurancensurance companycompany usesuses inin ssettingetting thethe ppricesrices ofof iitsts ppolicies.olicies. TThus,hus, iindividualsndividuals seemseem ttoo hhaveave ssomeome pprivaterivate iinformationnformation aaboutbout ttheirheir ppotentialotential llong-termong-term ccareare nneeds.eeds. AAtt tthehe ssameame ttime,ime, iindividualsndividuals iinn ttheirheir ssampleample wwhoho bbuyuy iinsurancensurance aalsolso aarere mmoreore llikelyikely ttoo eengagengage inin hhealth-promotingealth-promoting “preventive“preventive behaviors,”behaviors,” suchsuch asas self-careself-care andand sseateat bbeltelt uuse,se, tthathat mmayay bbee ccorrelatedorrelated withwith riskrisk aversion.aversion. Thus,Thus, individualsindividuals whowho areare relativelyrelatively ccautiousautious aboutabout theirtheir ppersonalersonal ccareare ((“belt“belt aandnd ssuspenders”uspenders” ttypes)ypes) aarere aalsolso mmoreore llikelyikely ttoo ppurchaseurchase llong-termong-term ccare.are. TThesehese fi ndingsndings provideprovide a wayway toto understandunderstand oneone ofof thethe mainmain fi ndingsndings inin AmyAmy aandnd KKathleen’sathleen’s ppaper:aper: iinn contrastcontrast toto thethe basicbasic theoreticaltheoretical prediction,prediction, thethe uncondi-uncondi- ttionalional ccorrelationorrelation betweenbetween insuranceinsurance coveragecoverage andand lossloss isis nnotot sstatisticallytatistically ssignifiignifi cantlycantly ddifferentifferent fromfrom zero.zero. TheThe presencepresence ofof multiplemultiple dimensionsdimensions ofof privateprivate informationinformation pprovidesrovides anan eexplanationxplanation fforor tthishis ppatternattern bbecauseecause ssomeome ttypesypes ooff pprivaterivate iinformation,nformation, ssuchuch aass bbeliefseliefs aaboutbout tthehe llikelihoodikelihood ooff nnursingursing hhomeome uuse,se, aarere ppositivelyositively ccorrelatedorrelated wwithith thethe demanddemand forfor long-termlong-term carecare insuranceinsurance andand withwith thethe likelihoodlikelihood ofof receivingreceiving ppaymentayment fromfrom thethe policy,policy, whilewhile otherother typestypes ofof privateprivate information,information, suchsuch asas seatseat beltbelt uuse,se, areare positivelypositively correlatedcorrelated withwith thethe demanddemand forfor insuranceinsurance butbut negativelynegatively corre-corre- llatedated withwith thethe likelihoodlikelihood ofof policypolicy payouts.payouts. ThisThis paper,paper, andand particularlyparticularly AmyAmy andand KKathleen’sathleen’s oobservationsbservations aboutabout thethe relationshiprelationship betweenbetween risk-of-lossrisk-of-loss andand insuranceinsurance 176 Journal of Economic Perspectives

ppurchases,urchases, hashas inspiredinspired a growinggrowing literatureliterature thatthat focusesfocuses onon broaderbroader formsforms ofof cconsumeronsumer hheterogeneityeterogeneity inin iinsurancensurance mmarketsarkets aandnd ootherther ccontractingontracting eenvironments.nvironments. AAnnuitiesnnuities areare aanothernother iinsurancensurance marketmarket ccharacterizedharacterized byby asymmetricasymmetric informa-informa- ttionion andand adverseadverse selection.selection. VoluntaryVoluntary annuityannuity marketsmarkets inin mostmost countriescountries areare quitequite ssmall,mall, eveneven thoughthough standardstandard lifecyclelifecycle theoriestheories suggestsuggest thatthat manymany householdshouseholds mightmight bbenefienefi t fromfrom aannuitizingnnuitizing atat leastleast somesome ofof theirtheir wealth,wealth, therebythereby increasingincreasing theirtheir iinsurancensurance againstagainst livingliving unexpectedlyunexpectedly long.long. AdverseAdverse selectionselection isis oonene ppotentialotential eexpla-xpla- nnationation forfor tthehe llimitedimited ssizeize ooff tthehe aannuitynnuity mmarket.arket. IIff tthehe oonlynly bbuyersuyers ooff aannuitiesnnuities aarere tthosehose whowho expectexpect toto livelive forfor manymany yyears,ears, aandnd iiff tthesehese eexpectationsxpectations aarere ccorrelatedorrelated wwithith aactualctual lifelife length,length, thenthen aann aannuitynnuity ppolicyolicy tthathat iiss aactuariallyctuarially ffairair fforor aannuitynnuity bbuyersuyers wwillill bbee uunattractivenattractive fromfrom thethe perspectiveperspective ofof anan individualindividual withwith thethe population-averagepopulation-average mmortalityortality rrate.ate. AAmymy hhasas eexaminedxamined tthehe aannuitynnuity mmarketarket iinn ddetail,etail, ggeneratingenerating bbothoth nnewew iinsightsnsights aboutabout thisthis specifispecifi c marketmarket andand aboutabout thethe welfarewelfare economicseconomics ofof insuranceinsurance mmarketsarkets mmoreore ggenerally.enerally. AAmy’smy’s fi rrstst twotwo studiesstudies ofof annuityannuity markets,markets, writtenwritten withwith JamesJames Poterba,Poterba, comparedcompared tthehe degreedegree ofof adverseadverse selectionselection inin variousvarious segmentssegments ofof thethe U.K.U.K. annuityannuity market.market. UntilUntil 22011,011, participantsparticipants iinn mmanyany UU.K..K. rretirementetirement pplanslans wwereere rrequiredequired ttoo ppurchaseurchase aannui-nnui- tties,ies, andand soso thatthat nationnation hashas oneone ofof thethe largestlargest marketsmarkets forfor annuityannuity contracts.contracts. OneOne sstudytudy [2][2] contrastscontrasts thethe voluntaryvoluntary U.K.U.K. annuityannuity market,market, inin whichwhich individualsindividuals purchasepurchase aannuitiesnnuities withwith wealthwealth thatthat hashas beenbeen accumulatedaccumulated outsideoutside retirementretirement accounts,accounts, withwith tthehe compulsorycompulsory market,market, inin whichwhich individualsindividuals whowho havehave accumulatedaccumulated resourcesresources inin ddefiefi nedned contributioncontribution pensionpension plansplans areare requiredrequired toto annuitizeannuitize a fractionfraction ofof thesethese aassets.ssets. TheThe participantsparticipants inin suchsuch pensionpension plansplans —the—the “compulsory“compulsory annuitants”—areannuitants”—are nnotot a randomrandom samplesample ofof thethe population,population, butbut becausebecause thethe decisiondecision toto workwork forfor a pparticulararticular employeremployer isis typicallytypically mademade manymany yearsyears beforebefore retirement,retirement, thesethese partici-partici- ppantsants areare lessless likelylikely toto bebe self-selectedself-selected onon thethe basisbasis ofof mortalitymortality prospectsprospects thanthan areare tthosehose whowho purchasepurchase annuitiesannuities inin thethe voluntaryvoluntary market.market. TheThe datadata onon mortalitymortality ratesrates ssupportupport thisthis proposition.proposition. TThehe aage-specifige-specifi c mmortalityortality rratesates fforor tthehe ppopulationopulation aass a wwholehole aarere ggreaterreater tthanhan tthosehose fforor ccompulsoryompulsory aannuitants,nnuitants, wwhichhich aarere iinn tturnurn ggreaterreater tthanhan tthosehose fforor vvoluntaryoluntary aannuitants.nnuitants. TThishis fi ndingnding iiss cconsistentonsistent wwithith a ggreaterreater ddegreeegree ooff aadversedverse sselectionelection iinn tthehe vvoluntaryoluntary tthanhan tthehe ccompulsoryompulsory aannuitynnuity mmarket.arket. TThehe ootherther FFinkelsteininkelstein andand PoterbaPoterba studystudy [5][5] ofof annuitiesannuities examinesexamines a richrich datadata ssetet oonn tthosehose wwhoho purchasedpurchased annuityannuity policiespolicies fromfrom a largelarge U.K.U.K. insuranceinsurance companycompany ooverver a two-decadetwo-decade span.span. TheThe insuranceinsurance companycompany offeredoffered policiespolicies withwith differentdifferent timetime pprofirofi lesles ofof payouts,payouts, includingincluding a levellevel nominalnominal paymentpayment policypolicy asas wellwell asas oneone withwith ppayoutsayouts thatthat rroseose aatt tthehe rrateate ooff iinflnfl ation.ation. A centralcentral contributioncontribution ofof thisthis studystudy isis iitsts ffocusocus oonn tthehe cchoicehoice ofof insuranceinsurance policypolicy attributes,attributes, ratherrather thanthan thethe purchasepurchase ofof tthehe policypolicy perper se,se, asas a manifestationmanifestation ofof privateprivate information.information. TheThe empiricalempirical fi nd-nd- iingsngs suggestsuggest thatthat individualsindividuals whowho chosechose back-loadedback-loaded annuityannuity policiespolicies wherewhere thethe ppayoutsayouts roserose overover time,time, suchsuch asas inflinfl aation-indexedtion-indexed ppolicies,olicies, oonn aaverageverage livedlived longerlonger tthanhan thosethose whowho boughtbought annuitiesannuities thatthat offeredoffered mostmost ofof theirtheir benefibenefi tsts “up“up front.”front.” IInn aaddition,ddition, thosethose wwhoho ppurchasedurchased annuitiesannuities thatthat promisedpromised ssurvivorurvivor bbenefienefi tsts toto thethe aannuitant’snnuitant’s heirsheirs onon averageaverage predeceasedpredeceased thosethose whowho boughtbought annuitiesannuities withoutwithout thisthis cclause.lause. TThehe fi ndingsndings provideprovide furtherfurther supportsupport forfor thethe rolerole ofof privateprivate informationinformation inin Jonathan Levin and James Poterba 177

tthehe aannuitynnuity market,market, aandnd ttheyhey ssuggestuggest tthehe ppossibilityossibility ofof designingdesigning richerricher teststests thanthan ddiscreteiscrete ccomparisonsomparisons bbetweenetween tthosehose wwhoho hhaveave aandnd ddoo nnotot hhaveave iinsurance.nsurance. AAmy’smy’s ssubsequentubsequent collaborationcollaboration withwith LiranLiran EinavEinav andand PaulPaul SchrimpfSchrimpf [17][17] builtbuilt oonn tthesehese iinsightsnsights aaboutbout aannuitynnuity ppurchasingurchasing byby developingdeveloping andand estimatingestimating a struc-struc- tturalural mmodelodel ofof insuranceinsurance demanddemand thatthat allowedallowed forfor whatwhat maymay bebe thethe fi rstrst empiricalempirical eestimatesstimates ofof thethe welfarewelfare consequencesconsequences ofof asymmetricasymmetric information.information. ItIt alsoalso illustratesillustrates tthehe ccomplexityomplexity ooff ppolicyolicy design:design: forfor example,example, iitt sshowshows tthathat iinn ccertainertain cconditions,onditions, a rrequirementequirement thatthat everyoneeveryone participateparticipate inin thethe insuranceinsurance marketmarket maymay reducereduce welfarewelfare rrelativeelative toto thethe equilibriumequilibrium ofof aann iimperfectmperfect pprivaterivate mmarketarket wwithith aadversedverse sselection.election. TThehe structuralstructural modelingmodeling approachapproach takentaken inin thethe paperpaper presentspresents anan interestinginteresting ccontrastontrast ttoo AAmy’smy’s eearlierarlier wwork.ork. IItt rrequiresequires ssomeome sstrongtrong aassumptionsssumptions aaboutbout hhowow iindi-ndi- vvidualsiduals formform eexpectationsxpectations andand mmakeake cchoices.hoices. BButut iinn tturn,urn, tthesehese aassumptionsssumptions mmakeake iitt ppossibleossible toto analyzeanalyze a farfar widerwider rangerange ofof actualactual andand hypotheticalhypothetical policiespolicies thanthan inin thethe eearlierarlier studiesstudies thatthat limitedlimited attentionattention toto thethe correlationcorrelation betweenbetween insuranceinsurance choiceschoices aandnd ssubsequentubsequent mmortalityortality ((givengiven eexistingxisting ppolicies).olicies). OOnene lessonlesson fromfrom Amy’sAmy’s workwork onon insuranceinsurance marketmarket equilibriumequilibrium isis thatthat thethe ddegreeegree ofof aadversedverse selectionselection andand thethe extentextent toto whichwhich risksrisks areare pooledpooled dependsdepends a ggreatreat ddealeal oonn whetherwhether insurersinsurers cancan conditioncondition pricesprices onon individualindividual characteristics.characteristics. IInn [[14],14], wwithith PPoterbaoterba andand CCaseyasey RRothschild,othschild, AmyAmy iinvestigatesnvestigates howhow restrictingrestricting thethe iinformationnformation oonn wwhichhich iinsurersnsurers ccanan cconditionondition ppricesrices aaffectsffects mmarketarket ooutcomes.utcomes. AAss aann eexamplexample ofof itsits moremore generalgeneral fi ndings,ndings, thethe paperpaper rejectsrejects thethe simplesimple notionnotion thatthat bbanninganning tthehe uusese ooff ggenderender iinn ppricingricing aannuitiesnnuities willwill inevitablyinevitably redistributeredistribute fromfrom mmen—whoen—who onon aaverageverage diedie soonersooner andand thereforetherefore receivereceive higherhigher annuityannuity payoutspayouts inin a gender-separatinggender-separating equilibrium—toequilibrium—to women.women. InsteadInstead itit suggestssuggests thatthat insurersinsurers maymay fi nndd a rrangeange ofof waysways toto induceinduce self-selectionself-selection inin thethe insuranceinsurance market,market, forfor instanceinstance bbyy oofferingffering back-loadedback-loaded andand front-loadedfront-loaded policies.policies. IfIf thethe policiespolicies areare pricedpriced soso thatthat wwomenomen fi ndnd thethe back-loadedback-loaded policiespolicies moremore attractive,attractive, andand menmen thethe front-loaded,front-loaded, tthenhen tthehe selectionselection generatedgenerated byby thesethese voluntaryvoluntary choiceschoices willwill reducereduce thethe degreedegree ofof rredistributionedistribution aassociatedssociated wwithith a bbanan oonn ggender-basedender-based pricing.pricing.

Adverse Selection and Moral Hazard in Health Insurance

AAnothernother componentcomponent ofof Amy’sAmy’s workwork onon insuranceinsurance marketsmarkets hashas beenbeen a fruitfulfruitful ccollaborationollaboration withwith EinavEinav andand MarkMark Cullen,Cullen, focusingfocusing primarilyprimarily onon problemsproblems ofof aadversedverse sselectionelection aandnd mmoraloral hhazardazard iinn hhealthealth iinsurance.nsurance. IInn [16],[16], theythey showedshowed howhow variationvariation inin insuranceinsurance pricesprices cancan bebe usedused toto obtainobtain eestimatesstimates ooff iinsurancensurance demanddemand andand coveragecoverage costs,costs, whichwhich inin turnturn allowallow forfor esti-esti- mmatesates ooff thethe consumerconsumer andand producerproducer surplussurplus thatthat mightmight resultresult fromfrom differentdifferent ppricingricing arrangements.arrangements. AmyAmy andand herher coauthorscoauthors exploitexploit a richrich datadata setset onon thethe healthhealth iinsurancensurance offeringsofferings thatthat areare availableavailable toto employeesemployees atat a largelarge multidivisionmultidivision U.S.U.S. ccompany.ompany. TThehe ““price”price” variationvariation thatthat underliesunderlies theirtheir empiricalempirical workwork arisesarises fromfrom thethe ffactact tthathat ddifferentifferent employeesemployees withinwithin thethe companycompany areare chargedcharged differentdifferent premiumspremiums fforor ppurchasingurchasing moremore ccomprehensiveomprehensive healthhealth insurance.insurance. EmployeesEmployees faceface a numbernumber 178 Journal of Economic Perspectives

ooff cchoiceshoices withwith regardregard toto copaycopay rates,rates, deductibles,deductibles, andand correspondingcorresponding monthlymonthly ppremiumremium ccosts.osts. TThehe ppaperaper eexploresxplores tthehe eempiricalmpirical iimplicationsmplications ooff tthehe wwell-knownell-known pprinciplerinciple tthathat wwhenhen anan insuranceinsurance companycompany offersoffers a suitesuite ofof policiespolicies toto a setset ofof potentialpotential buyers,buyers, cchangeshanges inin thethe priceprice ofof a givengiven policypolicy cancan affectaffect thethe costcost ofof deliveringdelivering thatthat policypolicy tthroughhrough thethe inducedinduced effecteffect onon thethe setset ofof consumersconsumers whowho purchasepurchase thethe policy.policy. LikeLike ssomeome ootherther sstudiestudies ooff employer-sponsoredemployer-sponsored healthhealth planplan choice,choice, thisthis projectproject yieldsyields cclearlear eevidencevidence ooff aadversedverse sselection,election, wwithith tthehe ccostliestostliest iindividualsndividuals ttoo ccoverover aalsolso bbeingeing tthehe mostmost eeagerager ttoo enrollenroll inin insuranceinsurance plansplans withwith generousgenerous coverage.coverage. AtAt thethe samesame ttime,ime, hhowever,owever, tthehe resultsresults suggestsuggest thatthat thethe conditionsconditions forfor largelarge welfarewelfare distortionsdistortions aarere nnotot mmet.et. TThishis result—thatresult—that thethe presencepresence ofof adverseadverse selectionselection doesdoes notnot itselfitself implyimply largelarge wwelfareelfare losses—deserveslosses—deserves elaboration.elaboration. InIn a competitivecompetitive insuranceinsurance market,market, thethe poten-poten- ttialial forfor welfarewelfare lossloss arisesarises becausebecause atat a zero-profizero-profi t equilibriumequilibrium thethe marketmarket priceprice fforor insuranceinsurance isis equalequal toto thethe costcost ofof coveringcovering thethe averageaverage enrollee.enrollee. WithWith adverseadverse sselection,election, thisthis priceprice isis aboveabove thethe costcost ofof coveringcovering thethe marginalmarginal enrollee,enrollee, soso thatthat tootoo ffewew iindividualsndividuals ppurchaseurchase iinsurance.nsurance. PPracticallyractically speaking,speaking, welfarewelfare losseslosses areare llikelyikely ttoo bbee llargearge onlyonly whenwhen adverseadverse selectionselection resultsresults inin a substantialsubstantial priceprice distortiondistortion andand ttherehere iiss eenoughnough pprice-sensitivityrice-sensitivity oonn tthehe ppartart ooff cconsumersonsumers tthathat tthehe ooverlyverly hhighigh ppricerice ddeterseters mmanyany ffromrom ppurchasing.urchasing. AAmy’smy’s ppaperaper wwasas aamongmong tthehe fi rstrst toto showshow empiricallyempirically tthathat thethe adverseadverse selectionselection couldcould bebe substantial,substantial, yetyet thethe resultingresulting welfarewelfare distortiondistortion rrelativelyelatively mmodest.odest. OOnene especiallyespecially nicenice featurefeature ofof Amy’sAmy’s [16][16] paperpaper withwith EinavEinav andand CullenCullen isis thatthat iitt explainsexplains welfarewelfare distortionsdistortions underunder adverseadverse selectionselection usingusing a demanddemand andand supplysupply aapproachpproach thatthat connectsconnects toto moremore standardstandard partialpartial equilibriumequilibrium welfarewelfare analysesanalyses ofof ttaxesaxes oror subsidies.subsidies. Amy’sAmy’s paperpaper withwith EinavEinav inin thisthis journal,journal, [20],[20], walkswalks throughthrough thisthis aapproachpproach graphically,graphically, aandnd mmakesakes fforor a uusefulseful aandnd rrelativelyelatively llightight iintroductionntroduction ttoo tthehe rrecentecent eempiricalmpirical lliteratureiterature oonn aadversedverse sselection.election. IInn a ffollow-upollow-up toto thisthis workwork usingusing datadata fromfrom thethe samesame fi rmrm [22],[22], thethe samesame ccoo aauthors,uthors, togethertogether withwith SchrimpfSchrimpf andand StephenStephen Ryan,Ryan, exploreexplore thethe relationshiprelationship bbetweenetween adverseadverse selectionselection andand moralmoral hazardhazard inin healthhealth insurance.insurance. TheyThey beginbegin withwith tthehe observationsobservations thatthat individualsindividuals differdiffer inin howhow theythey respondrespond toto more-more- andand less-less- ggenerousenerous ccoverageoverage aandnd tthathat tthesehese ddifferencesifferences ccanan ggenerateenerate a nnovelovel fformorm ooff sselectionelection iinn iinsurancensurance ppurchasing.urchasing. ForFor iinstance,nstance, mmovingoving ssomeoneomeone iintonto a hhigh-deductibleigh-deductible pplanlan mmightight lleadead toto a considerableconsiderable reductionreduction inin healthcarehealthcare utilization.utilization. ButBut ifif a companycompany iintroducesntroduces a hhigh-deductibleigh-deductible planplan asas oonene ooff sseveraleveral ooptions,ptions, tthehe eeffectffect mmayay bbee mmuteduted iiff tthehe iindividualsndividuals wwhoho sselectelect iitt aarere ppreciselyrecisely tthosehose wwhosehose hhealthcareealthcare uutilizationtilization iiss rrela-ela- ttivelyively insensitiveinsensitive toto out-of-pocketout-of-pocket costs.costs. ThisThis studystudy exploitsexploits thethe richrich datadata oonn iinsurancensurance oofferingsfferings andand workerworker choiceschoices notnot onlyonly toto documentdocument differencesdifferences inin individualindividual priceprice rresponsiveness,esponsiveness, butbut alsoalso toto estimateestimate a structuralstructural modelmodel thatthat incorporatesincorporates bothboth planplan sselectionelection andand healthcarehealthcare utilization.utilization. TheThe modelmodel suggestssuggests thatthat “selection“selection onon moralmoral hhazard”azard” indeedindeed maymay mitigatemitigate somesome ofof thethe anticipatedanticipated healthcarehealthcare spendingspending reduc-reduc- ttionsions ffromrom oofferingffering pplanslans wwithith hhighigh ccostost ssharing,haring, aass pprice-responsiverice-responsive iindividualsndividuals ttendend ttoo aavoidvoid tthesehese pplans.lans. Amy Finkelstein: 2012 John Bates Clark Medalist 179

TThehe ddegreeegree ttoo wwhichhich iindividualndividual hhealthcareealthcare uutilizationtilization respondsresponds toto cchangeshanges iinn oout-of-pocketut-of-pocket costscosts isis a mmuch-debateduch-debated empiricalempirical question,question, andand itit lliesies aatt tthehe ccenterenter ooff mmanyany pproposalsroposals fforor iinsurancensurance mmarketarket rreform.eform. TThehe qquestionuestion iiss ddiffiiffi cultcult toto answeranswer forfor sseveraleveral reasons.reasons. First,First, anan appropriateappropriate researchresearch designdesign wouldwould approximateapproximate randomrandom aassignmentssignment ooff iindividualsndividuals intointo ddifferentifferent ccostost ssharingharing aarrangements—butrrangements—but suchsuch aann aarrangementrrangement isis ddiffiiffi cultcult toto fi ndnd inin practice.practice. Second,Second, mostmost insuranceinsurance plansplans areare highlyhighly nnonlinear,onlinear, oftenoften involvinginvolving a deductible,deductible, a coinsurancecoinsurance rate,rate, andand anan out-of-pocketout-of-pocket mmaximum,aximum, ssoo iitt ooftenften iiss nnotot cclearlear wwhathat ““price”price” cconsumersonsumers fface.ace. IInn [[25],25], AAmymy wwithith AAviavia AAron-Dine,ron-Dine, Einav,Einav, andand CullenCullen developdevelop a cleverclever strategystrategy forfor analyzinganalyzing howhow consumersconsumers rrespondespond ttoo nnonlinearonlinear iinsurancensurance ccoverage.overage. TTheyhey rrelyely oonn tthehe ffactact tthathat ccoverageoverage iiss nnotot pproratedrorated forfor individualsindividuals hiredhired atat differentdifferent pointspoints duringduring a calendarcalendar year.year. A workerworker wwhoho isis hiredhired inin November,November, andand whowho participatesparticipates inin a planplan withwith a $500$500 annualannual per-per- wworkerorker deductible,deductible, isis muchmuch lessless likelylikely toto havehave medicalmedical expensesexpenses inin excessexcess ofof thethe ddeductibleeductible thanthan isis a wworkerorker wwhoho iiss hhiredired iinn JJanuaryanuary aandnd wwhoho pparticipatesarticipates iinn tthehe ssameame pplanlan fforor tthehe wwholehole ccalendaralendar yyear.ear. BByy ccomparingomparing iindividualsndividuals hhiredired aatt ddifferentifferent ppointsoints iinn ttime,ime, ssomeome ooff wwhomhom wwillill llaterater eexceedxceed theirtheir deductible,deductible, itit isis possiblepossible toto assessassess wwhetherhether individualsindividuals respondrespond toto theirtheir expectedexpected out-of-pocketout-of-pocket priceprice givengiven thethe levellevel ooff ttotalotal mmedicaledical eexpendituresxpenditures tthathat ttheyhey mmayay eexperiencexperience bbeforeefore yyear-end.ear-end. TThehe ppaperaper fi nndsds tthathat iindividualndividual behaviorbehavior isis somewhat,somewhat, bbutut nnotot ffully,ully, forwardforward looking.looking. A relatedrelated paperpaper withwith Einav,Einav, IulianaIuliana Pascu,Pascu, andand CullenCullen [24][24] returnsreturns toto thethe ssubjectubject ooff hheterogeneityeterogeneity inin insuranceinsurance demand,demand, andand studiesstudies thethe extentextent toto whichwhich iindividualsndividuals displaydisplay similarsimilar degreesdegrees ofof riskrisk aversionaversion inin variousvarious choicechoice domains.domains. ItIt fi ndsnds thatthat productproduct choicechoice inin oneone insuranceinsurance marketmarket cancan bebe quitequite informativeinformative aboutabout pproductroduct choicechoice inin ootherther iinsurancensurance mmarketsarkets bbutut tthathat ttherehere iiss llessess aassociationssociation bbetweenetween cchoiceshoices iinn iinsurancensurance marketsmarkets andand ootherther fi nancialnancial decisions,decisions, suchsuch asas thethe stock-bondstock-bond mmixix iinn a rretirementetirement pplan.lan. A ccommonommon ffeatureeature ofof Amy’sAmy’s healthhealth insuranceinsurance paperspapers asas wellwell asas somesome ofof herher workwork oonn annuitiesannuities isis thatthat theythey involveinvolve analysisanalysis ofof largelarge datasetsdatasets consistingconsisting ofof administra-administra- ttiveive rrecordsecords tthathat iincludenclude iinformationnformation aaboutbout iinsurancensurance pplanlan cchoiceshoices aandnd ssubsequentubsequent iinsurancensurance claims.claims. ThisThis typetype ooff ddataata hhasas bbecomeecome aann iimportantmportant rresourceesource fforor eecono-cono- mmistsists wworkingorking onon insuranceinsurance markets.markets. Amy’sAmy’s surveysurvey paperpaper withwith EinavEinav andand LevinLevin [[21]21] ddiscussesiscusses somesome ofof thethe issuesissues thatthat arisearise inin modelingmodeling andand estimatingestimating empiricalempirical mmodelsodels ooff insuranceinsurance demanddemand andand costscosts withwith thisthis typetype ofof data.data. TheThe paperpaper explainsexplains tthathat ttherehere aarere ttwowo ggeneraleneral sstrategiestrategies fforor aassessingssessing ppricingricing iincentivesncentives oorr wwelfareelfare llossesosses uundernder aasymmetricsymmetric iinformation.nformation. OOnene iinvolvesnvolves eestimatingstimating hhowow cchangeshanges iinn ppricerice aaffectffect cconsumeronsumer purchasespurchases andand insurerinsurer costs,costs, whilewhile thethe otherother involvesinvolves estimatingestimating param-param- eetersters ssuchuch aass iindividualndividual rrisk-aversionisk-aversion iinn a mmodelingodeling fframeworkramework tthathat sspecifipecifi eses exactlyexactly hhowow aandnd wwhyhy cconsumersonsumers dderiveerive uutilitytility ffromrom iinsurance.nsurance.

Government Provision and Regulation of Health Insurance

IIssuesssues concerningconcerning thethe economiceconomic effectseffects ofof governmentgovernment provisionprovision ofof hhealthealth iinsurancensurance arisearise inin manymany settings,settings, includingincluding thethe MedicareMedicare andand MedicaidMedicaid programs,programs, 180 Journal of Economic Perspectives

aandnd thethe ongoingongoing nationalnational debatedebate aboutabout healthhealth insuranceinsurance coveragecoverage andand marketmarket sstructure.tructure. AAmymy hhasas mmadeade sseveraleveral iimportantmportant ccontributionsontributions iinn tthishis aarea.rea. OOnene ooff AAmy’smy’s bbest-knownest-known ppapers,apers, [[9],9], eexaminesxamines hhowow tthehe iintroductionntroduction ooff MMedi-edi- ccareare aaffectedffected tthehe ddemandemand fforor hhealthealth ccareare iinn tthehe UUnitednited SStates.tates. MManyany nnoneconomistsoneconomists eexpectxpect thatthat thethe aanswernswer toto tthishis qquestionuestion iiss wwell-known,ell-known, ssinceince MMedicareedicare rrepresentedepresented a ddramaticramatic cchangehange iinn hhealthealth iinsurancensurance pprovision.rovision. BButut bbecauseecause tthehe cchangehange aaffectedffected tthehe wwholehole nation,nation, empiricalempirical researchersresearchers havehave foundfound itit ddiffiiffi cultcult toto constructconstruct a counter-counter- ffactualactual thatthat cancan bebe usedused toto understandunderstand howhow thethe presencepresence ofof MedicareMedicare hashas affectedaffected tthehe hhealthcareealthcare mmarketplace.arketplace. AAmymy ddevisedevised aann iinsightfulnsightful identifiidentifi cationcation strategystrategy toto circumventcircumvent thisthis diffidiffi cultyculty bbyy ccomparingomparing thethe effecteffect ofof thethe introductionintroduction ofof MedicareMedicare onon hospitalhospital expendituresexpenditures bbyy elderlyelderly householdshouseholds inin differentdifferent rregionsegions ooff tthehe UUnitednited SStates.tates. PPriorrior ttoo tthehe iintroduc-ntroduc- ttionion ooff MMedicare,edicare, tthehe iincidencencidence ooff hhospitalizationospitalization iinsurancensurance ppoliciesolicies vvariedaried wwidelyidely aacrosscross regions,regions, soso thethe fractionfraction ofof elderlyelderly householdshouseholds whowho experiencedexperienced changeschanges inin ttheirheir aabilitybility ttoo ppayay fforor hhospital-basedospital-based ccareare wwhenhen MMedicareedicare wwasas iintroducedntroduced aalsolso vvariedaried aacrosscross regions.regions. AlthoughAlthough thethe policypolicy changechange waswas national,national, thethe effecteffect ofof thethe policypolicy rrelativeelative ttoo tthehe ppriorrior situationsituation variedvaried substantiallysubstantially acrossacross regions.regions. AAmy’smy’s sstudytudy fi nndsds tthathat iinn pplaceslaces wwherehere MMedicareedicare hhadad aann eespeciallyspecially llargearge eeffectffect iinn eexpandingxpanding iinsurancensurance ccoverage,overage, ttherehere wwasas aann eespeciallyspecially llargearge iincreasencrease iinn hhealthealth eexpenditures.xpenditures. A rrelatedelated sstudytudy wwithith RRobinobin MMcKnightcKnight [[12]12] fi ndsnds thatthat thethe introductionintroduction ooff MMedicareedicare aaffectedffected tthehe ddistributionistribution ooff oout-of-pocketut-of-pocket mmedicaledical eexpendituresxpenditures fforor eelderlylderly hhouseholdsouseholds iinn tthehe UUnitednited SStates,tates, aalthoughlthough iitt hhadad nnoo ddiscernibleiscernible iimpactmpact oonn mmortalityortality rrates.ates. ThisThis workwork onon thethe introductionintroduction ofof MedicareMedicare isis arguablyarguably thethe mostmost convincingconvincing eempiricalmpirical aanalysisnalysis ttoo ddateate ooff hhowow tthehe mmostost ddramaticramatic cchangehange iinn hhealthealth iinsurancensurance ppolicyolicy iinn UU.S..S. hhistoryistory aaffectedffected tthehe cconsumptiononsumption aandnd fi nnancingancing ooff hhealthealth ccare.are. AAnothernother iimportantmportant aandnd rrelatedelated pprojectroject eevaluatesvaluates tthehe eeffectffect ooff eexpandingxpanding MMedicaidedicaid ccoverage.overage. TThishis pproject,roject, wwhichhich AAmymy hhasas ccarriedarried ooutut iinn cconjunctiononjunction wwithith a llargearge teamteam ofof collaboratorscollaborators includingincluding SarahSarah Taubman,Taubman, BillBill Wright,Wright, MiraMira Bernstein,Bernstein, JJonathanonathan Gruber,Gruber, JosephJoseph Newhouse,Newhouse, HHeidieidi AAllen,llen, KKatherineatherine BBaicker,aicker, aandnd tthehe OOregonregon HealthHealth StudyStudy GroupGroup [19,[19, 23],23], isis remarkableremarkable onon manymany dimensions.dimensions. OneOne isis tthehe ingenuityingenuity ofof thethe rresearchesearch aapproach.pproach. IInn 22008,008, OOregonregon eexpandedxpanded tthehe ccoverageoverage ooff itsits MedicaidMedicaid pprogramrogram bbutut ddidid nnotot hhaveave eenoughnough rresourcesesources ttoo aallowllow uuniversalniversal aaccessccess ttoo tthishis pprogram.rogram. AAss a rresult,esult, aaccessccess ttoo ccoverageoverage wwasas aallocatedllocated bbyy llottery,ottery, ttherebyhereby creatingcreating a large-scalelarge-scale randomizedrandomized experiment.experiment. AfterAfter learninglearning aboutabout thisthis llotteryottery systemsystem inin thethe newsnews media,media, AmyAmy andand herher fellowfellow researchersresearchers rushedrushed toto obtainobtain ffundingunding andand toto fi eldeld a llarge-scalearge-scale mmailail ssurveyurvey ccollectingollecting ddataata oonn iinsurancensurance sstatus,tatus, hhealthcareealthcare uutilization,tilization, fi nancialnancial strain,strain, aandnd hhealthealth cconditionsonditions aamongmong tthosehose wwhoho wwouldould ppotentiallyotentially bbee eeligibleligible fforor MMedicaidedicaid ccoverage.overage. TTheyhey ssubsequentlyubsequently ccombinedombined tthishis datadata withwith informationinformation fromfrom creditcredit reports,reports, hospitalhospital discharges,discharges, andand mortalitymortality rrecords.ecords. FForor a ssubsetubset ooff tthehe ppopulation,opulation, ttheyhey hhaveave aalsolso cconductedonducted iin-personn-person iinterviewsnterviews andand physicalphysical healthhealth exams,exams, andand collectedcollected biometricbiometric datadata asas well.well. InIn a rremarkablyemarkably shortshort periodperiod ooff time,time, tthehe researchresearch tteameam hhasas aamassedmassed aann aastonishingstonishing aarrayrray ofof informationinformation aaboutbout tthehe iindividualsndividuals wwhoho wwereere ppotentiallyotentially aaffectedffected bbyy tthehe OOregonregon healthhealth iinsurancensurance llottery.ottery. Jonathan Levin and James Poterba 181

TThehe eearlyarly fi ndingsndings ffromrom tthehe OOregonregon sstudytudy ssuggestuggest tthathat tthehe iinsurancensurance eexpansionxpansion iincreasedncreased utilizationutilization ofof medicalmedical carecare andand alsoalso thatthat itit reducedreduced out-of-pocketout-of-pocket healthhealth ccostsosts andand ledled toto higherhigher self-reportedself-reported physicalphysical andand mentalmental healthhealth status.status. SubsequentSubsequent aanalysisnalysis uusingsing thethe biometricbiometric datadata areare likelylikely toto shedshed lightlight onon whetherwhether increasedincreased carecare lleadseads ttoo mmeasureableeasureable sshort-termhort-term cclinicallinical hhealthealth bbenefienefi tts.s. RResultsesults ffromrom aanalyzingnalyzing tthehe OOregonregon eexperimentxperiment hhaveave jjustust bbegunegun ttoo aappear.ppear. BButut bbecauseecause ooff tthehe rrandomizedandomized aaccessccess ttoo hhealthealth iinsurancensurance tthathat uunderliesnderlies tthishis sstudy,tudy, aandnd tthehe ccarefullyarefully pplannedlanned aandnd eexecutedxecuted sstatisticaltatistical aanalysis,nalysis, tthehe rresultsesults aarere llikelyikely ttoo bbee vviewediewed aass tthehe ““goldgold sstandard”tandard” fforor eevalu-valu- aatingting hhowow hhealthealth iinsurancensurance aavailabilityvailability aaffectsffects hhouseholdousehold bbehaviorehavior aandnd wwelfare.elfare. IInn aadditionddition ttoo hherer wworkork oonn MMedicareedicare aandnd MMedicaid,edicaid, AAmymy hhasas ttackledackled a nnumberumber ooff otherother issuesissues relatedrelated toto government’sgovernment’s rolerole inin healthhealth insuranceinsurance markets.markets. HerHer eearliestarliest workwork onon healthhealth insurance,insurance, [1],[1], exploredexplored thethe effecteffect ofof thethe taxtax exclusionexclusion forfor hhealthealth insuranceinsurance premiumspremiums paidpaid byby employers.employers. ExistingExisting studiesstudies ofof thisthis topictopic havehave bbeeneen hhamstrungamstrung bbyy tthehe eempiricalmpirical ddiffiiffi cultyculty ofof distinguishingdistinguishing differencesdifferences inin marginalmarginal ttaxax rratesates acrossacross householdshouseholds fromfrom differencesdifferences inin otherother factorsfactors thatthat maymay affectaffect thethe ddemandemand fforor healthhealth insurance.insurance. AmyAmy examinedexamined a provincialprovincial taxtax reformreform inin QuebecQuebec iinn 19931993 thatthat substantiallysubstantially reducedreduced thethe taxtax subsidysubsidy toto employer-providedemployer-provided healthhealth iinsurance.nsurance. ByBy comparingcomparing thethe correspondingcorresponding changechange inin healthhealth insuranceinsurance demanddemand iinn QQuebecuebec wwithith tthehe cchangehange iinn hhealthealth iinsurancensurance demanddemand inin otherother provinces,provinces, sheshe cconcludedoncluded thatthat taxtax subsidiessubsidies havehave signifisignifi cantcant effectseffects onon healthhealth insuranceinsurance demand.demand. IInn tthehe ccasease ooff QQuebec,uebec, tthehe eestimatesstimates ssuggestuggest tthathat iinsurancensurance ccoverageoverage ffellell 2200 ppercentercent aass a rresultesult ofof thethe taxtax change.change. ThisThis fi ndingnding impliedimplied a priceprice elasticityelasticity ofof employeremployer ddemandemand fforor iinsurancensurance coveragecoverage withwith respectrespect toto thethe after-taxafter-tax priceprice ofof suchsuch coveragecoverage ooff aaboutbout – 00.5..5. A rrelatedelated ppaperaper [[3]3] sstudiestudies aanothernother ggovernmentovernment ppolicyolicy tthathat aaffectsffects iinsurancensurance mmarkets:arkets: mminimuminimum ccoverageoverage rrequirements.equirements. TTherehere iiss a llong-standingong-standing ddebateebate iinn iinsurancensurance mmarketsarkets aandnd ootherther ssettingsettings aaboutbout wwhetherhether ggovernmentovernment mminimuminimum qqualityuality sstandardstandards rraiseaise wwelfare.elfare. OOnn oonene sside,ide, mminimuminimum qqualityuality sstandardstandards mmayay rraiseaise pproductroduct ccostost aandnd lleadead ssomeome cconsumersonsumers ttoo ddroprop ooutut ooff mmarketsarkets iinn wwhichhich ttheyhey wwouldould ootherwisetherwise hhaveave ppurchasedurchased llower-qualityower-quality aandnd lless-expensiveess-expensive ggoods.oods. TThishis eeffectffect ttendsends ttoo rreduceeduce wwelfare.elfare. HHowever,owever, bbyy pprovidingroviding cconsumersonsumers wwhoho ccontinueontinue ttoo ppurchaseurchase tthehe pproductroduct wwithith a fformorm ooff qqualityuality aassurance,ssurance, ssuchuch rregulationsegulations mmightight rraiseaise wwelfare.elfare. AAmymy eevaluatesvaluates tthishis ttrade-offrade-off iinn tthehe ccasease ooff tthehe hhealthealth iinsurancensurance mmarketarket fforor eelderlylderly AAmericans.mericans. IInn tthehe eearlyarly 11980s,980s, tthehe ffederalederal ggovernmentovernment eencouragedncouraged sstatestates ttoo rrequireequire tthathat aallll iinsurersnsurers oofferingffering ppoliciesolicies ddesignedesigned ttoo ssupplementupplement tthehe bbasicasic MMedicareedicare iinsurancensurance ppackage—ackage— sso-calledo-called ““MedigapMedigap ppolicies”—hadolicies”—had ttoo pproviderovide a sspecifipecifi eded levellevel ooff mminimuminimum ccoverage.overage. CComparingomparing iinsurancensurance ppurchasesurchases bbyy eelderlylderly hhouseholdsouseholds bbeforeefore aandnd aafterfter tthehe iimposi-mposi- ttionion ooff tthesehese mminimuminimum sstandardstandards rrevealseveals a ssubstantialubstantial ddeclineecline iinn tthehe ooverallverall rrateate ooff ccoverage,overage, ssuggestinguggesting tthathat tthehe nnegativeegative eeffectffect ooff mminimuminimum sstandardstandards oonn qquantityuantity ddemandedemanded ooperatedperated fforor aatt lleasteast a ssignifiignifi ccantant ssharehare ooff MMedicareedicare bbenefienefi cciaries.iaries. AAmy’smy’s ffocusocus oonn tthehe detaileddetailed provisionsprovisions ofof insuranceinsurance marketsmarkets andand onon howhow theythey aaffectffect mmarketarket pparticipantsarticipants aandnd mmarketarket eequilibriumquilibrium iiss aalsolso eevidentvident iinn [[6],6], a sstudytudy tthathat eexploresxplores hhowow tthehe pprovisionrovision ooff ppartialartial ppublicublic iinsurancensurance mmayay aaffectffect iinsurancensurance mmarketarket ooutcomes.utcomes. AmyAmy eexploresxplores tthishis iissuessue bbyy cconsideringonsidering hhowow tthehe aavailabilityvailability ofof Medicare,Medicare, 182 Journal of Economic Perspectives

wwhichhich isis ppartialartial ppublicublic insuranceinsurance forfor healthcarehealthcare outlays,outlays, affectsaffects thethe privateprivate marketmarket fforor iinsurancensurance fforor rresidual,esidual, MMedicare-uninsured,edicare-uninsured, risks.risks. SShehe ffocusesocuses oonn iinsurancensurance fforor pprescriptionrescription drugs,drugs, whichwhich werewere notnot ccoveredovered byby MMedicareedicare dduringuring tthehe ttimeime pperioderiod ooff hherer study.study. AmyAmy notesnotes thatthat priorprior toto ageage 65,65, manymany individualsindividuals areare coveredcovered byby healthhealth iinsurancensurance policiespolicies thatthat pproviderovide bbothoth hhospitalizationospitalization coveragecoverage andand pprescriptionrescription ddrugrug ccoverage.overage. AtAt ageage 65,65, however,however, whenwhen theythey becomebecome eligibleeligible forfor Medicare,Medicare, theythey maymay lloseose ttheirheir pprescriptionrescription drugdrug coverage.coverage. WhileWhile thisthis studystudy fi ndsnds littlelittle changechange inin thethe ooverallverall probabilityprobability ofof individualsindividuals havinghaving prescriptionprescription drugdrug insuranceinsurance beforebefore andand aafterfter ageage 65,65, itit doesdoes uncoveruncover a shiftshift inin thethe setset ofof individualsindividuals whowho havehave thisthis coverage.coverage. AAfterfter ageage 65,65, thethe ccoverageoverage raterate aamongmong tthehe lleasteast hhealthyealthy mmembersembers ooff tthehe ppopulationopulation rrises,ises, wwhilehile tthathat aamongmong hhealthierealthier individualsindividuals remainsremains stablestable oror declines.declines. InIn theoret-theoret- iicalcal mmodelsodels ooff pprivaterivate mmarketarket iinsurance,nsurance, iitt iiss ppossibleossible tthathat tthehe iintroductionntroduction ooff ppartialartial ccoverageoverage byby thethe ggovernmentovernment cancan uupsetpset a ppoolingooling eequilibriumquilibrium iinn wwhichhich ddifferentifferent rriskisk ttypesypes ppurchaseurchase tthehe ssameame iinsurancensurance ccoverage,overage, aandnd lleadead ttoo a sseparatingeparating eequilibriumquilibrium iinn wwhichhich low-risklow-risk individualsindividuals willwill optopt notnot toto purchasepurchase coverage.coverage. TheThe fi ndingsndings inin Amy’sAmy’s sstudytudy areare consistentconsistent withwith thethe emergenceemergence ofof a separatingseparating equilibriumequilibrium forfor thethe post-65post-65 ppopulationopulation withwith thethe highesthighest riskrisk group,group, thosethose individualsindividuals inin poorpoor health,health, receivingreceiving ffullull iinsurancensurance wwhilehile tthehe bbetteretter rrisksisks ddoo nnotot hhaveave pprescriptionrescription drugdrug insurance.insurance.

Long-Term Care Insurance

AAmymy hhasas ddevotedevoted substantialsubstantial researchresearch efforteffort toto understandingunderstanding thethe marketmarket forfor llong-termong-term ccareare iinsurance.nsurance. SShehe sstudiedtudied tthehe rroleole ooff mmultidimensionalultidimensional hheterogeneityeterogeneity iinn thisthis marketmarket inin herher jointjoint workwork withwith McGarry;McGarry; inin a relatedrelated sequencesequence ofof paperspapers withwith JJeffreyeffrey Brown,Brown, [8,[8, 11,11, 15],15], sheshe hashas studiedstudied otherother aspectsaspects ofof thisthis insuranceinsurance market.market. SSomeome ooff hherer wworkork wwithith BBrown,rown, [[18],18], aappearedppeared iinn tthishis jjournal.ournal. WWhilehile aagingging iindividualsndividuals faceface substantialsubstantial riskrisk thatthat theythey willwill requirerequire costlycostly long-long- ttermerm ccare,are, rrelativelyelatively ffewew ppurchaseurchase llong-termong-term ccareare iinsurance.nsurance. IInn [[8],8], BBrownrown aandnd FFinkelsteininkelstein estimateestimate thethe loadload factorsfactors onon long-termlong-term carecare insuranceinsurance policies.policies. WhileWhile tthehe expectedexpected payoutspayouts onon thesethese policiespolicies areare typicallytypically lowerlower thanthan theirtheir premiums,premiums, mmakingaking themthem llessess thanthan actuariallyactuarially fair,fair, thethe divergencedivergence fromfrom thethe benchmarkbenchmark ofof actu-actu- aarialrial fairnessfairness isis nnotot ssubstantiallyubstantially ddifferentifferent ffromrom tthehe ddivergenceivergence iinn a nnumberumber ooff ootherther iinsurancensurance mmarketsarkets iinn wwhichhich ttherehere iiss mmoreore aactivective cconsumeronsumer iinterest.nterest. A rrelatedelated study,study, [11],[11], suggestssuggests thatthat Medicaid,Medicaid, whichwhich coverscovers thethe costcost ofof long-long- ttermerm ccareare forfor householdshouseholds thatthat exhaustexhaust theirtheir assets,assets, maymay playplay a keykey rolerole inin crowdingcrowding ooutut tthehe pprivaterivate insuranceinsurance market.market. ForFor manymany households,households, MedicaidMedicaid isis a substitutesubstitute fforor privateprivate long-termlong-term carecare insurance,insurance, andand itsits presencepresence reducesreduces thethe willingnesswillingness toto ppayay fforor pprivaterivate insurance.insurance. InIn particular,particular, privateprivate insuranceinsurance policiespolicies mustmust continuecontinue ttoo ppayay eevenven iiff ssomeoneomeone bbecomesecomes MMedicaid-eligible,edicaid-eligible, wwhichhich mmakesakes tthehe ccostost ooff pprivaterivate llong-termong-term ccareare iinsurancensurance hhighigh rrelativeelative ttoo tthehe nnet-of-Medicaidet-of-Medicaid bbenefienefi tsts receivedreceived byby aann iinsurancensurance bbuyer.uyer. TThehe sstudytudy uundertakesndertakes a qquantitativeuantitative aanalysisnalysis ttoo sseeee wwhetherhether tthehe iimplicitmplicit ttaxax tthathat MMedicaidedicaid iimposesmposes oonn pprivaterivate iinsurancensurance bbenefienefi ttss ccanan eexplainxplain wwhyhy tthehe mmarketarket iiss ssoo Amy Finkelstein: 2012 John Bates Clark Medalist 183

ssmall.mall. TThehe ssubstantiveubstantive iimportancemportance ooff MMedicaidedicaid ddependsepends oonn tthehe ddistributionistribution ooff wwealthealth aandnd iincomencome aamongmong eelderlylderly hhouseholdsouseholds bbecauseecause ssomeome hhouseholdsouseholds wwithith hhighigh llevelsevels ooff fi nancialnancial wwealth,ealth, wwhoho aarere vveryery uunlikelynlikely ttoo ddrawraw ddownown ttheirheir aassetsssets ccompletely,ompletely, aarere aalsolso uunlikelynlikely ttoo bbee aaffectedffected bbyy tthehe ppresenceresence ooff MMedicaid.edicaid. FForor llow-wealthow-wealth hhouseholds,ouseholds, iinn ccontrast,ontrast, tthehe iimplicitmplicit ttaxax eeffectsffects ccanan bbee mmuchuch mmoreore iimportant.mportant. UUsingsing a ccarefullyarefully ccali-ali- bbratedrated mmodelodel aalonglong wwithith hhousehold-levelousehold-level ddataata oonn iincomencome aandnd wwealth,ealth, tthishis sstudytudy fi nndsds tthathat a ssubstantialubstantial ffractionraction ooff eelderlylderly hhouseholdsouseholds ffaceace vveryery hhighigh iimplicitmplicit ttaxes,axes, wwhichhich rresultesult iinn pprivaterivate llong-termong-term ccareare iinsurancensurance hhavingaving rrelativelyelatively llowow vvaluealue ooncence MMedicaidedicaid iiss ttakenaken iintonto aaccount.ccount. TThehe rresultsesults iinn tthesehese ppapersapers ssuggestuggest a sstraightforwardtraightforward ddemand-emand- ssideide eexplanationxplanation fforor tthehe llimitedimited iinterestnterest iinn pprivaterivate llong-termong-term ccareare iinsurance.nsurance.

Innovation in Health Care

EExplainingxplaining thethe risingrising costcost ofof healthhealth carecare relativerelative toto otherother goodsgoods isis oneone ofof thethe ccentralentral questionsquestions inin bothboth healthhealth economicseconomics andand publicpublic fi nancenance becausebecause healthhealth ccostsosts aarere a ccrucialrucial componentcomponent ofof governmentgovernment spending.spending. OneOne frequentlyfrequently mentionedmentioned hhypothesisypothesis holdsholds thatthat ttechnologicalechnological changechange inin thethe hhealthcareealthcare sectorsector hashas producedproduced iincreasinglyncreasingly expensiveexpensive treatmentstreatments forfor variousvarious diseases.diseases. ToTo evaluateevaluate thisthis possibility,possibility, aandnd howhow publicpublic policypolicy mightmight affectaffect thethe futurefuture coursecourse ofof innovation,innovation, itit isis impor-impor- ttantant ttoo uunderstandnderstand thethe extentextent toto whichwhich newnew productproduct introductionsintroductions inin healthhealth carecare aarere “supply“supply driven”—thatdriven”—that is,is, determineddetermined byby thethe currentcurrent statestate ofof technicaltechnical knowl-knowl- eedge—ordge—or ““demanddemand ddriven,”riven,” aandnd tthushus ddeterminedetermined bbyy tthehe mmarketarket rreturnseturns ffromrom a nnewew pproduct.roduct. AAmymy hhasas sstudiedtudied tthishis iissuessue iinn sseveraleveral ccontexts.ontexts. IInn [4],[4], AmyAmy eexploresxplores hhowow cchangeshanges inin federalfederal healthhealth insuranceinsurance rulesrules withwith rregardegard ttoo vvaccineaccine ccoverage,overage, aandnd ootherther cchangeshanges tthathat aaffectedffected tthehe ddemandemand fforor sspecifipecifi c vvaccines,accines, affectedaffected thethe levellevel ofof privateprivate researchresearch andand developmentdevelopment spendingspending onon newnew vvaccines.accines. AmyAmy identifiidentifi eses threethree policypolicy changeschanges thatthat increasedincreased thethe potentialpotential benefibenefi tsts ttoo ppharmaceuticalharmaceutical fi rmsrms producingproducing vaccines,vaccines, twotwo ofof whichwhich areare relatedrelated toto insuranceinsurance ppolicyolicy reforms.reforms. OneOne isis thethe 19931993 expansionexpansion ofof MedicareMedicare toto covercover thethe costcost ofof fl u vvaccines.accines. TThehe ssecondecond iiss tthehe 11986986 iintroductionntroduction ooff tthehe ffederalederal VVaccineaccine IInjurynjury CCompen-ompen- ssationation Fund,Fund, whichwhich createdcreated a trusttrust fundfund toto compensatecompensate thosethose injuredinjured byby receivingreceiving a vvaccination—andaccination—and thusthus reducedreduced thethe ppotentialotential llegalegal lliabilityiability ooff fi rmsrms producingproducing suchsuch vvaccines.accines. TThehe tthirdhird rreformeform sshehe eexamines,xamines, wwhichhich ddidid nnotot ooperateperate tthroughhrough iinsurancensurance mmarketsarkets butbut isis llikelyikely ttoo hhaveave rresultedesulted inin anan outwardoutward shiftshift inin thethe demanddemand forfor vacci-vacci- nnations,ations, isis thethe 19911991 recommendationrecommendation byby thethe CentersCenters forfor DiseaseDisease ControlControl thatthat allall iinfantsnfants shouldshould receivereceive HepatitisHepatitis B vaccinations.vaccinations. InIn thethe yearsyears ffollowingollowing eeachach ooff tthesehese rreforms,eforms, AAmymy fi ndsnds aann iincreasencrease iinn tthehe nnumberumber ooff nnewew cclinicallinical ttrialsrials fforor vvaccinesaccines tthathat aarere directeddirected atat thethe specifispecifi c diseasesdiseases coveredcovered byby eacheach reform.reform. TheseThese resultsresults offeroffer a nnovelovel andand iinterestingnteresting sourcesource ofof evidenceevidence forfor thethe linklink betweenbetween governmentgovernment policiespolicies aandnd tthehe nnatureature ooff iinnovationnnovation aandnd ttechnicalechnical cchangehange inin thethe healthcarehealthcare sector.sector. AAnothernother creativecreative paperpaper onon innovation,innovation, jointjoint withwith DaronDaron AcemogluAcemoglu [10],[10], eexaminesxamines hhowow a cchangehange iinn MMedicareedicare tthathat iincreasedncreased tthehe ssharehare ooff ccapitalapital rrelativeelative ttoo laborlabor costscosts forfor whichwhich hospitalshospitals couldcould receivereceive reimbursementreimbursement fromfrom MedicareMedicare 184 Journal of Economic Perspectives

aaffectedffected hospitals’hospitals’ technologytechnology choiceschoices andand inputinput mix.mix. TheThe paperpaper suggestssuggests thatthat hhospitalsospitals shiftedshifted awayaway fromfrom laborlabor inputsinputs afterafter thisthis policypolicy change.change. TheThe skillskill mixmix ofof hhospitalospital employeesemployees aalsolso sshifted,hifted, aass vvariousarious mmodelsodels ooff ccapital–skillapital–skill ccomplementarityomplementarity wwouldould predict,predict, andand technologytechnology adoptionadoption increased,increased, suggestingsuggesting a highhigh degreedegree ofof ssubstitutionubstitution betweenbetween llaborabor aandnd ttechnology.echnology. TThishis ppaperaper pprovidesrovides ffurtherurther eevidencevidence fforor thethe signifisignifi ccanceance ooff ggovernmentovernment ppoliciesolicies iinn affectingaffecting iinnovationnnovation aandnd technologytechnology aadoptiondoption iinn tthehe hhealthealth ssector.ector.

Final Remarks

OOurur discussiondiscussion ofof Amy’sAmy’s researchresearch hashas highlightedhighlighted Amy’sAmy’s contributionscontributions toto thethe eeconomicsconomics ofof insuranceinsurance marketsmarkets andand healthhealth carecare andand alsoalso herher remarkableremarkable produc-produc- ttivity.ivity. AAmymy hhasas managedmanaged toto carrycarry outout severalseveral large-scalelarge-scale researchresearch programsprograms whilewhile ssupervisingupervising a steadysteady fl owow ofof graduategraduate students,students, coparentingcoparenting twotwo smallsmall childrenchildren withwith hherer hhusbandusband Ben,Ben, andand sstilltill fi ndingnding timetime toto sendsend multipage,multipage, single-spacedsingle-spaced emailsemails ttoo ccolleaguesolleagues whosewhose paperspapers sheshe hashas read.read. PerhapsPerhaps reflrefl ectingecting herher earlyearly trainingtraining asas a jjuggler,uggler, AAmymy mmanagesanages tthesehese mmultipleultiple rrolesoles wwithith ggoodood ccheerheer aandnd ggoodood hhumor.umor. WWee sstartedtarted thisthis essayessay byby notingnoting thethe dedicationdedication withwith whichwhich AmyAmy hashas pursuedpursued hherer primaryprimary rresearchesearch iinterests.nterests. HerHer rresearchesearch hashas occasionallyoccasionally rangedranged fartherfarther afiafi eld,eld, fforor iinstancenstance inin herher cleverclever studystudy [13][13] showingshowing howhow thethe introductionintroduction ofof automatedautomated ““EZ-Pass”EZ-Pass” systemssystems toto collectcollect bridgebridge andand tolltoll feesfees hashas ledled toto moremore frequentfrequent feefee iincreases.ncreases. However,However, AmyAmy generallygenerally hashas targetedtargeted herher researchresearch towardtoward a well-defiwell-defi nedned ssetet ooff iimportantmportant aandnd challengingchallenging questions:questions: howhow insuranceinsurance marketsmarkets areare affectedaffected bbyy problemsproblems ofof asymmetricasymmetric information;information; howhow largelarge socialsocial insuranceinsurance programsprograms aaffectffect hhealthcareealthcare markets;markets; andand howhow differentdifferent incentivesincentives affectaffect thethe raterate andand direc-direc- ttionion ofof healthcarehealthcare innovation.innovation. AmyAmy hashas mademade progressprogress onon thesethese classicclassic issuesissues bothboth bbyy connectingconnecting economiceconomic theorytheory toto empiricalempirical applicationapplication andand byby fi ndingnding richrich newnew ddataata sets.sets. TheseThese includeinclude provincialprovincial datadata onon healthhealth insuranceinsurance utilizationutilization inin Canada;Canada; aadministrativedministrative healthhealth claimsclaims ddataata ffromrom llargearge eemployers;mployers; hheretoforeeretofore uunavailablenavailable ddataata ffromrom BBritishritish iinsurancensurance ccompanies;ompanies; ddataata ffromrom AAmericanmerican HHospitalospital AAssociationssociation aarchivesrchives thatthat retainedretained paperpaper recordsrecords thatthat couldcould bebe digitized;digitized; and,and, inin herher recentrecent wworkork onon MMedicaid,edicaid, ccreditredit hhistories,istories, hhospitalospital rrecords,ecords, aandnd bbiometriciometric ddataata ffromrom hhealthealth eexams.xams. WWithith ccarefulareful aandnd rrigorousigorous econometriceconometric analysis,analysis, Amy’sAmy’s workwork hashas enrichedenriched tthehe sscholarlycholarly aanalysisnalysis ooff iinsurancensurance aandnd hhealthcareealthcare mmarkets,arkets, aandnd hhasas pprovidedrovided iimpor-mpor- ttantant iinsightsnsights fforor ppolicymakersolicymakers wwhoho aarere cconsideringonsidering rreformseforms ttoo tthesehese mmarkets.arkets.

■ We are grateful to Amy Finkelstein and Ben Olken for providing background information and to them as well as David Autor, Chang-Tai Hseih, and Timothy Taylor for helpful comments.