Ruhr Economic Papers

Ruhr Economic Papers #537

How Do Consumers Choose Health Insurance? – An Experiment on Heterogeneity in Attribute Tastes and Risk Preferences

by Nadja Kairies-Schwarz, Johanna Kokot, Markus Vomhof and Jens Wessling

UDE, 12/2014, 27 S./p., 8 Euro, ISBN 978-3-86788-614-7 DOI: 10.4419/86788614

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Abstract

Recent health policy reforms try to increase consumer choice. We use a laboratory experiment to analyze consumers’ tastes in typical contract attributes of health insurances and to investigate their relationship with individual risk preferences. First, subjects make consecutive insurance choices varying in the number and types of contracts offered. Then, we elicit individual risk preferences according to Cumulative Prospect Theory. Applying a latent class model to the choice data, reveals five classes of consumers with considerable heterogeneity in tastes for contract attributes. From this, we infer distinct behavioral strategies for each class. The majority of subjects use minimax strategies focusing on contract attributes rather than evaluating probabilities in order to maximize expected payoffs. Moreover, we show that using these strategies helps consumers to choose contracts, which are in line with their individual risk preferences. Our results reveal valuable insights for policy makers of how to achieve efficient consumer choice.

JEL-Classification: C91, I13, D81

Keywords: Health insurance; risk preferences; heterogeneity; heuristics; laboratory experiment; cumulative prospect theory

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