Melayne Morgan McInnes

Risk Aversion and Incentive Effects: Comment

Holt and Laury, AER 2002, develop an experimental design to determine the risk aversion of an individual. They use their observations to argue that increased incentives appear to change risk attitudes, leading to greater risk aversion. However, their main treatment, the effects of scaling up the stakes of the lottery choice task, is confounded by a simple order effect. We extend their design to test for these order effects, and show that they are indeed significant. The size of the stakes still affects measured risk aversion, but the effect is only one-half of the apparent effect when one does not control for task order.

Temporal stability of estimates of risk aversion

Estimates of risk aversion can be obtained from controlled laboratory experiments. The temporal stability of those preferences is assumed in many applications. This assumption is tested by eliciting risk aversion measures from subjects at two distinct times. Evidence consistent with the stability assumption is found.

The Impact of Insurance Prices on Decision-Making Biases: An Experimental Analysis

This article tests whether the use of endogenous risk categorization by insurers enables consumers to make better-informed decisions even if they do not choose to purchase insurance. We do so by adding a simple insurance market to an experimental test of optimal (Bayesian) updating. In some sessions, no insurance is offered. In others, actuarially fair insurance prices are posted, and a subset of subjects is allowed to purchase this insurance. We find significant differences in the decision rules used depending on whether one observes insurance prices. Although the majority of choices correspond to Bayesian updating, the incidence of optimal decisions is higher in sessions with an insurance option. Most subjects given the option to purchase actuarially fair insurance choose to do so. However, fewer subjects purchase insurance when the probability of a loss is higher.

The Case for Experience Rating in Medical Malpractice Insurance: An Empirical Evaluation

Experience rating is largely absent from medical malpractice insurance contracts. This article presents evidence that physician risk differences persist, and it develops an empirical model for experience rating with a semi-parametric estimator. Estimating the model using claims history data from Florida, the authors obtain improved prediction of individual claims over several years and provide a detailed picture of the incidence of surcharges under experience rating. This evidence suggests that an experience rating system would be feasible and would greatly reduce the subsidization across physician risk types that exists under most current medical malpractice insurance contracts.

Evaluating the tobacco settlement damage awards: too much or not enough?

OBJECTIVES This study compared the present economic value of the 1998 tobacco settlement with the present economic value of the damages attributable to tobacco. METHODS The 1987 National Medical Expenditure Survey was used to estimate the smoking attributable fraction (SAF) of medical expenditures. SAFs were then applied to Medicaid and other expenditures. RESULTS Settlement payments covered only 40% of Medicaid treatment costs already incurred and only 30% of past and projected future Medicaid costs. Excess medical expenditures for all other payment sources were roughly comparable to those incurred by Medicaid. CONCLUSIONS Although the settlement may reduce future smoking prevalence rates by limiting the ability of tobacco companies to promote smoking and by raising cigarette prices, euphoria over the huge settlement funds should be balanced by a sober comparison with the even larger damage amounts.

The Effects of Managed Care on Medical Referrals and the Quality of Specialty Care

This paper analyzes the role of referrals in the provision of surgical services. Primary physicians in managed care control patient access to specialists, while referrals in traditional insurance plans are less constrained. The traditional, fee-for-service insurance market is shown to achieve appropriate incentives for high quality care. In contrast, physicians with bad reputations may not lose HMOs referrals, owing to differences in incentives to cut costs. Empirically, we find that managed care may protect a physician whose reputation has been damaged by providing a source of referrals when shunning occurs in the FFS sector following a malpractice claim. Copyright 2002 by Blackwell Publishing Ltd

Medical Board Regulation of Physician Licensure: Is Excessive Malpractice Sanctioned?

This paper considers the deterrent effect that self-regulation has on a patient‘s propensity to sue under malpractice law. A model of tort-driven self regulation is developed and its implications are examined using data on the disciplinary actions of the Florida Medical Board and data on closed malpractice claims. Doctors who in 1987-1991 generated abnormal rates of malpractice claims had a higher rate of disciplinary actions in the following period 1992-1995. Significantly, the evidence suggests that the Board may also be more likely to discipline older physicians and non-certified practitioners, perhaps in response to special interests of industry members.

Bobbing for Widgets: Compensating Wage Differentials

The authors describe a classroom game that introduces the concept of compensating wage differentials by allowing students to negotiate over the assignment of jobs and wages. Two jobs are designed so that neither job requires special skills, but one is significantly more unpleasant than the other. By varying the job titles and duties, students can see how wages respond to changes in job characteristics. The impact of various policy measures, such as comparable worth legislation and safety regulation, is also explored. This game can be conducted in a 50-minute class and requires only a deck of cards, poker chips, and a container of ice water.

Does Job Coaching Work?: Evidence from South Carolina

Providing employment-related services, including supported employment through job coaches, to individuals with developmental disabilities has been a priority in federal policy for the past twenty years starting with the Developmental Disabilities Assistance and Bill of Rights Act in 1984. We take advantage of a unique panel data set of all clients served by the SC Department of Disabilities and Special Needs between 1999 and 2005 to investigate whether job coaching leads to stable employment in community settings. The data contain information on individual characteristics, such as IQ and the presence of emotional and behavioral problems, that are likely to affect both employment propensity and likelihood of receiving job coaching. We control for unobserved heterogeneity and endogeneity using fixed effects and instrumental variable models. Our results show that unobserved individual characteristics and endogeneity strongly bias naive estimates of the effects of job coaching. However, even after controlling for these, an economically and statistically significant effect remains.

Insurance Purchase for Low-Probability Losses

It is widely accepted that individuals tend to underinsure against low-probability, high-loss events relative to high-probability, low-loss events. This conventional wisdom is based largely on field studies, as there is very little experimental evidence. We reexamine this issue with an experiment that accounts for possible confounds in prior insurance experiments. Our results are counter to the prior experimental evidence, as we observe subjects buying more insurance for low-probability events than the higher-probability events, given a constant expected loss and load factor. Our results suggest that, to the extent underinsurance for catastrophic risk is observed in the field, it can be attributed to factors other than the relative probability of the loss events.