Limited Attention and the Demand for Health Insurance

We analyze how customers with limited attention value and choose among health plans. We show how the model can accommodate four observations regarding plan choice. First, people tend to overweight the premium and thus underappreciate the value of health insurance. Second, insurance companies may have a strong incentive to reduce quality and to hide these shortcomings in the ne print while attracting customers with insu ciently lower premiums. Third, customers may choose dominated alternatives. Finally, the willingness-to-pay for insurance is subadditive creating an incentive for providers to unbundle comprehensive plans. We discuss how these e ects may result in a fundamental dilemma for policy makers. JEL Classi cation: D18, D89, I11, I13