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Anran Li is an Assistant Professor of Economics at Cornell University.
TOPIC: Commitment, Competition, and Preventive Care Provision
ABSTRACT: Preventive care affects long-term population health. Insurer competition and limited consumer commitment disincentivize insurers’ preventive investment because insurers cannot internalize all investment savings as consumers leave in the future. Lessening competition creates a tradeoff by increasing both
preventive investment and premiums. I develop and estimate a dynamic equilibrium model where insurers compete on premiums and preventive investment, and insurers’ investment affects consumers’ health. Counterfactual analyses reveal that when transitioning to a single private insurer, insurers’ preventive investment
rises, and consumers’ medical expenses fall. The distortion to consumer surplus from forgone investment savings is on par with that from pricing power. These results demonstrate efficiency losses of fragmented insurer markets due to investment externalities.
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