Public Economics

October 26-27, 2017
Raj Chetty of Stanford University and Danny Yagan of the University of California, Berkeley, Organizers

Amy Finkelstein, MIT and NBER, and Nathaniel Hendren and Mark Shepard, Harvard University and NBER

Subsidizing Health Insurance for Low-Income Adults: Evidence from Massachusetts (NBER Working Paper No. 23668)

How much are low-income individuals willing to pay for health insurance, and what are the implications for insurance markets? Using administrative data from Massachusetts' subsidized insurance exchange, Finkelstein, Hendren, and Shepard exploit discontinuities in the subsidy schedule to estimate willingness to pay and costs of insurance among low-income adults. As subsidies decline, insurance take-up falls rapidly, dropping about 25% for each $40 increase in monthly enrollee premiums. Marginal enrollees tend to be lower-cost, consistent with adverse selection into insurance. But across the entire distribution researchers can observe – approximately the bottom 70% of the willingness to pay distribution – enrollee willingness to pay is always less than half of own expected costs. As a result, they estimate that take-up will be highly incomplete even with generous subsidies: if enrollee premiums were 25% of insurers' average costs, at most half of potential enrollees would buy insurance; even premiums subsidized to 10% of average costs would still leave at least 20% uninsured. Finkelstein, Hendren, and Shepard suggest an important role for uncompensated care for the uninsured in explaining these findings and explore normative implications.

Mark Duggan, Stanford University and NBER, and Atul Gupta and Emilie Jackson, Stanford University

The Impact of the Affordable Care Act: Evidence from California's Hospital Sector

The Affordable Care Act (ACA) authorized the largest expansion of public health insurance coverage in decades. Evidence on the effects of the ACA on utilization of medical care, patient health and on health care providers is still emerging. Duggan, Gupta, and Jacksone deploy administrative data from hospitals and emergency rooms in California over 2008-15 and present new empirical evidence on these outcomes. Their identification strategy exploits sharp discontinuities in Medicaid coverage at ages 21 and 65, where a large share of individuals historically became ineligible for the program. These discontinuities were significantly affected by the implementation of the ACA, creating additional exogenous variation in Medicaid eligibility. Researchers find evidence of substantial crowd-out of county insurance programs - implying a large transfer from federal taxpayers to local governments. They estimate a large increase in the rate of hospital and ER use due to insurance coverage among the near-elderly - at least two times greater than that predicted by individual Medicaid access changes. Insurance coverage leads to patient sorting toward privately owned and better quality hospitals, creating a gain in utility equivalent to cutting travel distance by 4 miles. However, this study finds only suggestive improvements in patient health. Financial benefits for hospitals are more readily apparent. Hospitals previously serving a high share of uninsured patients benefit disproportionately with a 10% increase in total revenue relative to remaining hospitals.

Alexander M. Gelber, the University of California at Berkeley and NBER; Timothy J. Moore, the University of Melbourne; and Alexander Strand, Social Security Administration

Disability Insurance Income Saves Lives

Gelber, Moore, and Strand show that higher payments from U.S. Social Security Disability Insurance (DI) reduce mortality. Using administrative data on all new DI beneficiaries from 1997 to 2009, they exploit discontinuities in the benefit formula through a regression kink design. Researchers estimate that $1,000 in annual DI payments decreases the annual mortality rate of lower-income beneficiaries by around 0.1 to 0.25 percentage points, implying that the elasticity of annual mortality with respect to annual DI income is around -0.6. These mortality effects imply large benefits that have not been taken into account in the welfare analysis of DI and other social income insurance programs.

Ethan Lieber, the University of Notre Dame, and Lee Lockwood, the University of Virginia and NBER

Targeting with In-kind Transfers: Evidence from Medicaid Home Care

Many of the most important government programs make transfers in kind as opposed to in cash. Making transfers in kind has the obvious cost that recipients would prefer cost-equivalent cash transfers. But making transfers in kind can have benefits as well, including better targeting transfers to desired recipients. In this paper, Lieber and Lockwood exploit large-scale randomized experiments run by three state Medicaid programs to investigate this central tradeoff for in-kind provision. They find that in-kind provision of formal home care significantly reduces the value of benefits to recipients while targeting benefits to a small fraction of the eligible population that has a greater demand for formal care, is sicker, and has worse informal care options than the average eligible. Under a wide range of assumptions within a standard model, the insurance benefit of the targeting effects exceeds the distortion cost. This highlights an important cost of recent reforms that move toward more flexible, cash-like benefits.

Katrine Jakobsen, University of Copenhagen; Kristian Jakobsen, Kraka; Henrik Kleven, Princeton University; and Gabriel Zucman, the University of California at Berkeley and NBER

Wealth Taxation and Wealth Accumulation: Theory and Evidence from Denmark

Philip Armour, RAND Corporation, and Michael Lovenheim, Cornell University and NBER

The Effect of Social Security Information on the Labor Supply of Older Americans

This paper examines how older workers adjust their labor supply in response to information they receive about their retirement wealth from the provision of the Social Security Statement. Armour and Lovenheim find that older male workers' labor supply is highly responsive to receiving personalized information about future Social Security benefits, leading to a reduction of 119 hours worked per year, on average. However, their estimates point to significant heterogeneity in this response, with workers at the lower end of the hours-worked distribution increasing their labor supply and those at the high end decreasing their labor supply. Researchers argue differences in knowledge about Social Security benefits across the labor supply distribution can explain much of this heterogeneity. They additionally explore the extent to which the information on the Statement may have led some workers to mistakenly reduce their labor supply by too much due to a lack of understanding of the dynamic nature of the Statement's benefit projections with respect to earnings. Receipt of a second Statement led all but the lowest hour workers to increase their labor supply relative to workers who did not receive a second Statement. This is consistent with workers misunderstanding the information provided as accumulated rather than projected wealth. This study results point to older workers being very responsive to Social Security information, which highlights the need to accurately convey information about both pension wealth and its sensitivity to changes in earnings.

Peter Ganong, the University of Chicago and NBER, and Pascal Noel, the University of Chicago

Consumer Spending During Unemployment: Positive and Normative Implications

Ganong and Noel study the spending of unemployment insurance (UI) recipients using de-identified bank account data. Nondurable spending falls by 6% at the onset of unemployment, is stable during UI receipt, and then falls by an additional 13% at benefit exhaustion. Their finding that spending responds to a large and predictable income drop is at odds with predictions from rational models, but can be matched by behavioral models with hand-to-mouth or inattentive consumers. Depressed spending after exhaustion implies that the consumption-smoothing gains from extending UI benefits are at least three times as big as the welfare gains from raising UI benefit levels.

Rebecca Diamond, Stanford University and NBER, and Timothy McQuade and Franklin Qian, Stanford University

The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence from San Francisco

In this paper, Diamond, McQuade, and Qian exploit quasi-experimental variation in the assignment of rent control due to a 1994 ballot initiative to study the welfare impacts of rent control on its tenant beneficiaries as well as the impact on landlords' responses and the rental market as a whole. Leveraging new micro data which tracks an individual's migration over time, they find that rent control increased the probability a renter stayed at their 1994 address by close to 20 percent. At the same time, using data on the history of individual parcels in San Francisco, this study finds that treated landlords reduced their supply of available rental housing by 15%, by either converting to condos/TICs, selling to owner occupied, or redeveloping buildings. This led to a city-wide rent increase of 7% and caused $5 billion of welfare losses to all renters. Researchers develop a dynamic, structural model of neighborhood choice to evaluate the welfare impacts of their reduced form effects. They find that rent control offered large benefits to impacted tenants during the 1995-2012 period, averaging between $3100 and $5900 per person each year, with aggregate benefits totaling over $423 million annually. The substantial welfare losses due to decreased housing supply could be mitigated if insurance against large rent increases was provided as a form of government social insurance, instead of a regulated mandate on landlords.

Marcelo L. Bérgolo, Rodrigo Ceni, and Matias Giaccobasso, IECON-UDELAR; Guillermo Cruces, Centro de Estudios Distributivos, Laborales y Soci; and Ricardo Perez-Truglia, the University of California at Los Angeles and NBER

Tax Audits as Scarecrows: Evidence from a Large-Scale Field Experiment (NBER Working Paper No. 23631)

According to the canonical model of Allingham and Sandmo (1972), firms evade taxes by making a trade-off between a lower tax burden and higher expected penalties. However, there is still no consensus about whether real-world firms operate in this rational way. Bérgolo, Ceni, Cruces, Giaccobasso, and Perez-Truglia conducted a large-scale field experiment, sending letters to over 20,000 firms that collectively pay over 200 million dollars in taxes per year. In thier letters, they provided firms with exogenous but nondeceptive signals about key inputs for their evasion decisions, such as audit probabilities and penalty rates. Researchers measure the effect of these signals on their subsequent perceptions about the auditing process, based on survey data, as well as on the actual taxes paid, according to administrative data. This study finds that firms do increase their tax compliance in response to information about audits. However, the patterns in these responses are inconsistent with utility maximization. The evidence suggests that, much like scarecrows frighten off birds, audits can be a significant deterrent for tax evaders even though they would be perceived as harmless by a rational optimizer.

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