Published Articles (peer-reviewed)
"Why Do People Buy Insurance? A Modern Answer to an Old Question" (2024), Risk Management and Insurance Review 27 (1), 89-114.
Three archetypical models of insurance demand based, respectively, on risk aversion, state-dependent marginal utility, and imperfectly divisible consumption are presented. These models show that the common principle underlying insurance is not always a risk transfer but meeting a conditional need. In general, insurance aligns the risk in one's financial endowment with the risk in one's financial needs. This extension of the traditional view of insurance allows simple generalizations of classic results, has implications for policy advice, and may help guiding further research.
"Cost-Sharing or Rebate: The Impact of Health Insurance Design on Reducing Inefficient Care" (2023, joint with Nadja Kairies-Schwarz and Christian Waibel), Frontiers in Behavioral Economics, Section Health Behaviors Vol. 2
This paper investigates how the design of health insurance plans impacts individuals' treatment decisions. We derive several hypotheses how the framing of incentives in a plan affects behavior and test these hypotheses in a laboratory experiment. Our results show that rebates are more effective in containing cost as individuals request significantly less inefficient low-value care under rebates than under cost-sharing. We elicit individuals' degree of loss aversion but find no evidence that loss aversion influences utilization rates. Instead, our results suggest that relative thinking and the difficulty of understanding the dynamic incentive structure drive the design effect.
"On the Value of Medicaid in Providing Access to Long-term Care" (2020), Journal of Public Economic Theory 22 (4), 933-948.
[The working-paper version circulates under the title: When the affordable has no value, and the valuable is unaffordable:The U.S. market for long-term care insurance and the role of Medicaid]
The crowding-out by Medicaid has been identified as a possible reason for the low demand for private long-term care insurance in the USA. I extend the previous analysis to the case in which budget constraints inhibit access to care. This reduces the role of the implicit tax and fundamentally changes the nature, scope, and welfare implications of crowding-out. It suggests a large value of Medicaid that a private insurance market is unable to offer due to a dilemma prevalent in - but not exclusive to - the market for long-term care insurance: a dilemma between access and affordability.
"Incentivizing Efficient Utilization Without Reducing Access: The Case Against Cost-Sharing in Insurance" (2020), Health Economics 29 (7), 827-840.
Cost-sharing is regarded as an important tool to reduce moral hazard in health insurance. Contrary to standard prediction, however, such requirements are found to decrease utilization both of efficient and of inefficient care. I employ a simple model that incorporates two possible explanations - consumer mistakes and limited access - to assess the welfare implications of different insurance designs. I find cost-sharing never to be an optimal solution as it produces two novel inefficiencies by limiting access. An alternative design, relying on bonuses, has no such side effects and achieves the same incentivization. I show how the optimal design can be deduced empirically and discuss possible impediments to its implementation.
"Mental Accounting, Access Motives, and Overinsurance" (2020), Scandinavian Journal of Economics 122 (2), 675-701.
The access motive for insurance posits that insurance derives its value from providing access to a loss remedy that is unaffordable without insurance. I explore the potential of this alternative insurance motive to explain attitudes towards modest risks, and I argue that mental accounting makes the access motive relevant for understanding both the popularity of warranties and the avoidance of deductibles. The value of partial insurance is shown to critically depend on the way in which the insurer pays benefits. This can explain several empirical regularities that are difficult to reconcile within existing models.
"Product Lines, Product Design, and Limited Attention" (2015, joint with Carsten Dahremöller), Journal of Economic Behavior and Organization 119, 437-456.
We analyze the manner in which a monopolist designs its product line when facing customers with limited attention. We assume that consumers simplify complex problems by neglecting some relevant aspects. This creates an incentive for a firm to supply simple products. Simultaneously, limited attention offers partial protection to customers from the monopolist's market power. We further assume that customers' attention varies with the set of alternatives. A firm may then manipulate its customers' attention through the range of products it offers. We show that a firm can increase its profit by introducing goods that have the sole function of manipulating consumer attention. Finally, we analyze the impact of limited attention on the screening of heterogeneous customers.
"On the value of information: Why people reject medical tests" (2015), Journal of Behavioral and Experimental Economics 56, 1-12.
[The working-paper version circulates under the title: On the Value of Medical Diagnosis: Why People Reject Medical Information]
We use a model of reference-dependent preferences proposed by Koszegi and Rabin (2009) to derive the value of information when a decision-maker is loss averse over changes in beliefs. This allows to model the anticipation of potential disappointment when receiving bad news. We show that this emotional impact depends on whether information is instrumental, i.e. whether it affects the decision about a subsequent action. The desirability of information in emotional terms can thus not be analyzed separately from its desirability in material terms. We apply the model to a patient's choice problem to undergo medical screening. The availability of effective cure and the timing of testing are predicted to be significant determinants of test uptake. This is in line with empirical research concerning patients' motives to decline testing.
Published Work (not peer-reviewed)
Nachhaltigkeit im Mittelstand - Die CSRD als Chance oder Herausforderung (2024, joint with J. Löher), in: Bertelsmann-Stiftung Focus Paper #18, Gütersloh.
Climate risks from a company perspective (2023, joint with S. Schlepphorst), IfM-Hintergrundpapier, IfM Bonn.
Adapting to climate change: Exploring the specific challenges for SMEs (2023, joint with S. Schlepphorst, C. Dienes, M. Holz, H.-J. Wolter), IfM Bonn, IfM-Materialien No. 297, Bonn.
The EU's support measures for sustainable financing - implications for the Mittelstand (2022, joint with J. Löher, S. Nielen, C. Schröder, IfM Bonn, IfM-Materialien No. 294, Bonn.
Mittelständische Unternehmen in der Covid-19-Pandemie - Betroffenheit von und Umgang mit der Krise (2022, joint with R. Kay, R. Weicht), IfM Bonn, IfM-Materialien No. 295, Bonn.
Die volkswirtschaftliche Bedeutung von Familien- und Frauenunternehmen (2022, joint with H.-J. Wolter), IfM Bonn: Daten und Fakten No. 28, Bonn.
Unternehmensnachfolgen in Deutschland 2022 bis 2026 (2022, joint with O. Suprinovič, N. Schlömer-Laufen, R. Kay), IfM Bonn: Daten und Fakten No. 27, Bonn.
Working Papers
"Limited Attention and the Demand for Health Insurance"
I model how customers with limited attention choose among health plans. The model can accommodate several observations regarding plan choice. First, people overweight the premium and thus underappreciate the value of health insurance. Second, insurance companies have a strong incentive to reduce quality and to hide these shortcomings in the fine print while attracting customers with insufficiently lower premiums. Third, customers may choose dominated alternatives. I show how consumer bias can be mitigated through unbundling and standardization. I analyze insurance provision in a competitive equilibrium and discuss how the proposed behavioral effects create a fundamental dilemma for policy makers.
"Complex Risk Attitudes with Piece-Wise Linear Utility Functions"
[This paper augments and supersedes ``A Note on the Equality of Insurance and Gambling Motives' and the first part of ``Risk Attitudes with State-Dependent Indivisibilities in Consumption''.]
Economic theory ties a person's risk attitudes to the curvature of the utility function, specifically the second and higher derivatives of this function. In contrast, a simple piece-wise linear utility function, that stems from an underlying consumption optimization problem with imperfectly divisible consumption, can also generate rich risk attitudes, including preferences for insurance and gambling. I show that the indivisibility of consumption induces preferences for long-shot gambles that have so far been tied to skewness preferences. While insurance and gambling have traditionally been considered natural opposites, adding state-dependence to a model of imperfectly divisible consumption results in a complementarity between the two activities.
"Financing State-Dependent Indivisible Expenses With Insurance"
[This paper augments and supersedes the second part of the working paper ``Risk Attitudes with State-Dependent Indivisibilities in Consumption''.]
Standard economic theory interprets insurance as a means for risk-averse individuals to transfer risk. I argue that another important function of insurance is to optimally finance indivisible expenses that only have value in particular states of nature. Contrary to traditional predictions, insurance is then a normal good, the additional consumption of the insured goods and services by the insured is not a sign of inefficiency, and the marginal-utility gap between states is not informative about the value of insurance. Acknowledging this additional purpose of insurance requires a novel understanding of risk attitudes in general, and a reconsideration and possibly reevaluation of previous policy advice.