Social Learning in the Demand for Employer-Sponsored Health Insurance

I use data from the University of California to empirically examine the role of social learning in employees’ choices of health plans. The basic empirical strategy starts with the observation that if social learning is important, decisions should appear to be correlated across employees within the same department. I present evidence of considerable “clustering” on health plans within departments, and estimate discrete choice models in which individuals’ perceptions of the payoffs associated with different alternatives are influenced by peers’ decisions. To distinguish social learning from the potential influence of common unobservable characteristics I propose and conduct a variety of tests, which taken together favor the social learning explanation. For example, I find that newly hired employees are more responsive to their peers’ decisions than existing employees, which I interpret as reflecting their relative lack of private information (and consequently their relative reliance on information communicated from coworkers).