Igal Hendel

Asymmetric Information in Health Insurance: Evidence from the National Medical Expenditure Survey

Adverse selection is perceived to be a major source of market failure in insurance markets. There is little empirical evidence on the extent of the problem. We estimate a structural model of health insurance and health care choices using data on single individuals from the NMES. A robust prediction of adverse-selection models is that riskier types buy more coverage and, on average, end up using more care. We test for unobservables linking health insurance status and health care consumption. We find no evidence of informational asymmetries.

Estimating Multiple-Discrete Choice Models: An Application to Computerization Returns

This paper develops a multiple-discrete choice model for the analysis of demand of differentiated products. Users maximize profits by choosing the number of units of each brand they purchase. Multiple-unit as well as multiple-brand purchases are allowed. These two features distinguish this model from classical discrete choice models which consider only a single choice among mutually exclusive alternatives. Model parameters are estimated using the simulated method of moments technique. Both requirements - microfoundations and estimability -are imposed in order to exploit the available micro level data on personal computer purchases. The estimated demand structure is used to assess welfare gains from computerization and technological innovation in peripherals industries. The estimated return on investment in computers is 90%. Moreover, a 10% increase in the performance to price ratio of microprocessors leads to a 4% gain in the estimated end user surplus.

The Role of Leasing Under Adverse Selection

Leasing contracts are extensively used in durable goods markets. These contracts specify a rental rate and an option price at which the used good can be bought on termination of the lease. This option price cannot be controlled when the car is sold. We show that in a world in which quality is observable, this additional control variable is ineffective. Under adverse selection instead, leasing contracts affect equilibrium allocations in a way that matches observed behavior in the car market. Consistent with the data, our model predicts that leased cars have a higher turnover and that off‐lease used cars are of higher quality. Moreover, the model predicts that the recent increase in leasing can be explained by the observed increase in car durability. We show that leasing contracts can improve welfare but that they are imperfect tools. We also show that a producer with market power can benefit from leasing contracts for two reasons: market segmentation and better pricing of the option. Moreover, despite the fact that lessors could structure contracts to prevent adverse selection, we show that this is not in their interest.

Sales and consumer inventory

Temporary price reductions (sales) are quite common for many goods and usually result in an increase in the quantity sold. We explore whether the data support the hypothesis that these increases are, at least partly, due to dynamic consumer behavior: at low prices consumers stockpile for future consumption. This effect, if present, has broad implications for interpretation of demand estimates. We construct a dynamic model of consumer choice and use it to derive testable predictions. We test the implications of the model using two years of store-level scanner data and data on the purchases of a panel of households over the same time. The results support the existence of household stockpiling behavior. (This abstract was borrowed from another version of this item.)

Competition under Financial Distress

This paper presents a link between product market competition and the financial situation--in particular asset composition--of firms, based on capital market imperfections. Consistent with the popular view, the model shows that firms under financial distress use aggressive pricing to generate cash. Firms resort to aggressive pricing in order to reshape their asset composition between nonliquid and liquid assets when new information renders their current composition nonoptimal. In contrast to the vast literature on inventories that has given little attention to pricing, the model links pricing and inventory behavior. Low pricing is used as a source of internal funding. Copyright 1996 by Blackwell Publishing Ltd.

Sales and Consumer Inventory

Temporary price reductions (sales) are quite common for many goods and usually result in an increase in the quantity sold. We explore whether the data support the hypothesis that these increases are, at least partly, due to dynamic consumer behavior: at low prices consumers stockpile for future consumption. This effect, if present, has broad implications for interpretation of demand estimates. We construct a dynamic model of consumer choice and use it to derive testable predictions. We test the implications of the model using two years of store-level scanner data and data on the purchases of a panel of households over the same time. The results support the existence of household stockpiling behavior.

Intertemporal Substitution and Storable Products

Storable products allow consumers to time their purchases to exploit price fluctuations. It has been documented that during promotions consumers buy more. The additional purchases are potentially intended not only for current use, but to be stockpiled for future consumption. This paper discusses the predictions of a consumer inventory model and reviews the available evidence. We then discuss the implications for demand estimation and present estimates of the economic magnitude of the dynamic effect of storability. (JEL: L0, L4, D1, D4) Copyright (c) 2004 The European Economic Association.

Product differentiation and endogenous disutility

Abstract This paper models the choice of degree of focus (or general purposeness) available to firms by endogenizing transportation costs in an address model of horizontal differentiation. The formulation is in three stages: entry, focus or design competition and price competition. The strategic effect of product design is analyzed. The equilibrium level of general purposeness is shown to depend critically on ‘neighbor exclusivity’. The latter and, more generally, market structure and product diversity are shown to depend on the cost of producing general purpose products. If general purposeness is ‘free’—to design and produce—only two firms enter the market and set large transportation costs, underproviding product diversity.

Small Steps for Workers, a Giant Leap for Productivity

We document the evolution of productivity in a steel mini mill with fixed capital, producing an unchanged product with Leontief technology working 24/7. Despite—almost—unchanged production conditions, output doubled within the sample period (12 years). We decompose the gains into downtime reductions, more rounds of production per time, and more output per run. After attributing productivity gains to investment and an incentive plan, we are left with a large unexplained component. Learning by experimentation, or tweaking, seems to be behind the continual and gradual process of productivity growth. The findings suggest that capacity is not well defined, even in batch-oriented manufacturing. (JEL D24, D83, G31, J24, L23, L61)

Aggressive pricing as a source of funding

Abstract The role of aggressive pricing as a source of internal funding is studied. We find that during recessions, excepting the 1990–1 recession, smaller-firm industries reduce markups more than large-firm industries, moreover, markup reductions increase in inventory intensity.