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Bunching at The Kink: Implications for Spending Responses to Health Insurance Contracts

Jun 2016
Working Paper
16-032
By  Liran Einav, Amy Finkelstein, Paul Schrimpf

A large literature in empirical public .nance relies on "bunching" to identify a behavioral response to non-linear incentives and to translate this response into an economic object to be used counterfactually. We conduct this type of analysis in the context of prescription drug insurance for the elderly in Medicare Part D, where a kink in the individual.s budget set generates substantial bunching in annual drug expenditure around the famous "donut hole." We show that different alternative economic models can match the basic bunching pattern, but have very different quantitative implications for the counterfactual spending response to alternative insurance contracts. These findings illustrate the importance of modeling choices in mapping a compelling reduced form pattern into an economic object of interest.

Publication Keywords: 
Bunching
Medicare
health insurance
Health Care