A behavioral decomposition of willingness to pay for health insurance

Aurélien Baillon*, Aleli Kraft, Owen O’Donnell, Kim van Wilgenburg

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

1 Citation (Scopus)

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.

Original languageEnglish
Pages (from-to)43-87
Number of pages45
JournalJournal of Risk and Uncertainty
Volume64
Issue number1
Early online date22 Mar 2022
DOIs
Publication statusE-pub ahead of print - 22 Mar 2022

Bibliographical note

Funding Information:
We thank Pierre Koning, Menno Pradhan, Peter Wakker and participants at various seminars and conferences for comments. We are grateful to the World Bank for funding the Daisy III survey and especially Caryn Bredenkamp for the opportunity to collect the data on risk perception and attitude as part of this survey. The research of Aurelien Baillon is made possible by a Vidi grant of the Netherlands Organization for Scientific Research. Owen O’Donnell is supported by the Swiss Agency for Development and Cooperation / National Science Foundation Programme for Research on Global Issues for Development through the grant, “Inclusive social protection for chronic health problems” (400640_160374, PI: Jürgen Maurer).

Funding Information:
In seeking consent, the enumerator informed that they were from an independent market research company and their purpose was not to sell anything. They explained that the survey was for a research project of the University of the Philippines School of Economics funded by the European Commission. The interviewee was assured that information provided would be treated with utmost confidentiality and used for research purposes only.

Funding Information:
We thank Pierre Koning, Menno Pradhan, Peter Wakker and participants at various seminars and conferences for comments. We are grateful to the World Bank for funding the Daisy III survey and especially Caryn Bredenkamp for the opportunity to collect the data on risk perception and attitude as part of this survey. The research of Aurelien Baillon is made possible by a Vidi grant of the Netherlands Organization for Scientific Research. Owen O?Donnell is supported by the Swiss Agency for Development and Cooperation / National Science Foundation Programme for Research on Global Issues for Development through the grant, ?Inclusive social protection for chronic health problems? (400640_160374, PI: J?rgen Maurer).

Publisher Copyright:
© 2022, The Author(s).

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