The Welfare Impact of Long-Term Con tracts
Abstract:
We present a dynamic model of health insurance with on
e-sided commitment to assess the welfare impact of long-term contracting. W
e use a rich data set with individual-level data on health risk, health sta
tus transitions, insurance choices, and consumer demographics to empiricall
y study equilibrim these dynamic contracts and assess their positive and no
rmative implications. We compare these outcomes under (i) spot contracts (i
i) long-run contracts with two-sided commitment (iii) long-term contracts w
ith one-sided commitment and (iv) ACA-like markets with spot contracts and
community rating. Empirically, dynamic contracts with one-sided commitment
achieve close to the first-best, relative to spot contracts, for consumers
with flat income profiles who are happy to front-load payments to facilitat
e long-run insurance. Consumers with steeper income growth over their lifet
imes get a lower benefit from these contracts because front-loading payment
s is relatively costly.
Dynamic contracts are preferred to the ACA-li
ke markets we investigate for consumers with flatter income profiles, but n
ot preferred for consumers with steeper income profiles.