Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/220026
Authors: 
Baillon, Aurélien
Kraft, Aleli
O'Donnell, Owen
van Wilgenburg, Kim
Year of Publication: 
2019
Series/Report no.: 
Tinbergen Institute Discussion Paper No. TI 2019-077/I
Publisher: 
Tinbergen Institute, Amsterdam and Rotterdam
Abstract: 
Despite widespread exposure to substantial medical expenditure risk in low-income populations, health insurance enrollment is typically low. This is puzzling from the perspective of expected utility theory. To help explain it, this paper introduces a decomposition of the stated willingness to pay (WTP) for insurance into its fair price and three behavioral deviations from that price due to risk perception and risk attitude consistent with prospect theory, plus a residual. To apply this approach, we elicit WTP, subjective distributions of medical expenditures and risk attitude (utility curvature and probability weighting) from Filipino households in a nationwide survey. We find that the mean stated WTP of the uninsured is less than both the actuarially fair price and the subsidized price at which public insurance is offered. This is not explained by downwardly biased beliefs: both the mean and the median subjective expectation are greater than the subsidized price. Convex utility in the domain of losses pushes mean WTP below the fair price and the subsidized price, and the transformation of probabilities into decision weights depresses the mean further, at least using one of two specific decompositions. WTP is reduced further by factors other than risk perception and attitude.
Subjects: 
Health insurance
willingness to pay
subjective probability
prospect theory
medical expense
JEL: 
I13
D84
Document Type: 
Working Paper

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