Public Economics

November 7-8, 2013
Amy Finkelstein of MIT and Hilary Hoynes of University of California, Berkeley, Organizers

Liran Einav, Stanford University and NBER; Amy Finkelstein; and Paul Schrimpf, University of British Columbia

The Response of Drug Expenditure to Non-Linear Contract Design: Evidence from Medicare Part D (NBER Working Paper 19393)

Einav, Finkelstein, and Schrimpf study the demand response to non-linear price schedules using data on insurance contracts and prescription drug purchases in Medicare Part D. Consistent with a static response of drug use to price, they document bunching of annual drug spending as individuals enter the famous "donut hole" where insurance becomes discontinuously much less generous on the margin. Consistent with a dynamic response to price, the authors document a response of drug use to the future out-of-pocket price by using variation in beneficiary birth month which generates variation in contract duration during the first year of eligibility. Motivated by these two facts, they develop and estimate a dynamic model of drug use during the coverage year that allows them to quantify and explore the effects of alternative contract designs on drug expenditures. For example, their estimates suggest that "filling" the donut hole, as required under the Affordable Care Act, will increase annual drug spending by $180 per beneficiary, or about 10 percent. Moreover, almost half of this increase is "anticipatory," coming from beneficiaries whose spending prior to the policy change would leave them short of reaching the donut hole. The authors also describe the nature of the utilization response and its heterogeneity across individuals and types of drugs.

Nathaniel Hendren, Harvard University and NBER

The Policy Elasticity (NBER Working Paper 19177)

Hendren applies basic price theory to study the marginal welfare impact of government policy changes. In contrast to the canonical marginal excess burden framework, the framework does not require a decomposition of behavioral responses to the policy into income and substitution effects. The causal effects of the policy are sufficient. Moreover, in the broad class of models where the government is the only distortion, the causal impact of the behavioral response to the policy on the government budget is sufficient for all behavioral responses. Because these behavioral responses vary with the policy in question and are, in general, neither pure Hicksian nor Marshallian elasticities, the author calls them policy elasticities. The model provides formal justification for a simple benefit/cost ratio measure for non-budget neutral policies: the welfare impact on beneficiaries per dollar of government expenditure. The author calculates this ratio using existing causal effects from five policy changes: the top marginal income tax rate, earned income tax credit (EITC) generosity, food stamps, job training, and housing vouchers. Comparisons across beneficiaries of such policies are accomplished using social marginal utilities of income. For example, the mid-range of existing causal estimates suggest increasing EITC generosity financed by an increase in the top marginal income tax rate is desirable if and only if one prefers giving an additional $0.44 to $0.66 to an EITC-eligible single mother (earning less than $40,000) relative to an additional $1 to a person subject to the top marginal tax rate (earning more than $400,000).

Wojciech Kopczuk, Columbia University and NBER; Justin Marion, University of California Santa Cruz; Erich Muehlegger, Harvard University and NBER; and Joel Slemrod, University of Michigan and NBER

Do the Laws of Tax Incidence Hold? Point of Collection and the Pass-Through of State Diesel Taxes (NBER Working Paper 19410)

The canonical theory of taxation holds that the incidence of a tax is independent of the side of the market which is responsible for remitting the tax to the government. However, this prediction does not survive in certain circumstances, for example, when the ability to evade taxes differs across economic agents. Kopczuk, Marion, Muehlegger, and Slemrod estimate in the context of state diesel fuel taxes how the incidence of a quantity tax depends on the point of tax collection, where the level of the supply chain responsible for remitting the tax varies across states and over time. Their results indicate that moving the point of tax collection from the retail station to a higher point in the supply chain substantially raises the pass-through of diesel taxes to the retail price. Furthermore, tax revenues respond positively to collecting taxes from the distributor or prime supplier rather than from the retailer, suggesting that evasion is the likely explanation for the incidence result.

Francois Gerard, Columbia University, and Gustavo Gonzaga, University of California at Berkeley

Informal Labor and the Cost of Social Programs: Evidence from 15 Years of Unemployment Insurance in Brazil

It is widely believed that the presence of a large informal sector increases the efficiency costs of social programs in developing countries. Gerard and Gonzaga develop a simple theoretical model of optimal unemployment insurance (UI) that specifies the efficiency–insurance tradeoff in the presence of informal job opportunities. They combine the model with evidence drawn from 15 years of uniquely comprehensive administrative data to quantify the social costs of the UI program in Brazil. They show that exogenous extensions of UI benefits led to a decline in formal sector reemployment rates because of offsetting increases in informal employment. However, because reemployment rates in the formal sector are low, most of the extra benefits were actually received by claimants who did not change their employment behavior. Consequently, only a fraction of the cost of UI extensions was attributable to perverse incentive effects and the efficiency costs were thus relatively small: only 20 percent as large as in the United States, for example. Using variation in the relative size of the formal sector across different regions and over time in Brazil, the authors show that the efficiency costs of UI extensions are actually larger in regions with a larger formal sector. Finally, they show that UI exhaustees have relatively low levels of disposable income, suggesting that the insurance value of longer benefits in Brazil may be sizable. In sum, the results overturn the conventional wisdom, and indicate that efficiency considerations may in fact become more relevant as the formal sector expands.

Hunt Allcott, New York Univesity and NBER, and Dmitry Taubinsky, Harvard University

The Lightbulb Paradox: Evidence from Two Randomized Control Trials

It is often suggested that consumers are imperfectly informed about or inattentive to energy costs of durable goods such as cars, air conditioners, and light bulbs. Allcott and Taubinsky study two randomized control experiments that provide information on energy costs and product lifetimes for energy-efficient compact fluorescent light bulbs (CFLs) versus traditional incandescent bulbs. They use a formal theoretical framework to evaluate energy efficiency subsidies and standards as second-best corrective policies if powerful information disclosure is not feasible. Results suggest that moderate CFL subsidies may be optimal, but imperfect information and inattention do not appear to justify a ban on traditional incandescent light bulbs.

Ilyana Kuziemko, Columbia University and NBER; Katherine Meckel, Columbia University; and Maya Rossin-Slater, University of California, Santa Barbara

Do Insurers Risk-Select against Each Other? Evidence from Medicaid and Implications for Health Reform (NBER Working Paper 19198)

Increasingly in U.S. public insurance programs, the state finances and regulates competing, capitated private health plans but does not directly insure beneficiaries through a public fee-for-service (FFS) plan. Kuziemko, Meckel, and Rossin-Slater develop a simple model of risk-selection in such settings. Capitation incentivizes insurers to retain low-cost clients and thus improve their care relative to high-cost clients, who they prefer would switch to a competitor. The authors test this prediction using county transitions from FFS Medicaid to capitated Medicaid managed care (MMC) for pregnant women and infants. They first document the large health disparities and corresponding cost differences between blacks and Hispanics, who comprise the large majority of Medicaid enrollees in their data, with black births costing nearly double those of Hispanics. Consistent with the model, black-Hispanic infant health disparities widen under MMC (that is, the black-Hispanic mortality gap grows by 42 percent) and black mothers' pre-natal care worsens relative to that of Hispanics. Remarkably, black birth rates fall (and abortions rise) significantly after MMC, consistent with mothers reacting to poor care by reducing fertility, or to plans discouraging births from high-cost groups. Implications for the Affordable Care Act exchanges are discussed.