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Unobserved Heterogeneity, State Dependence, and Health Plan Choices

Working paper #840
Ariel Pakes, Jack Porter, Mark Shepard and Sophie Calder-Wang

Abstract
We provide a new method to analyze discrete choice models with state dependence and individual-by-product fixed effects, and use it to analyze consumer choices in a policy-relevant environment (a subsidized health insurance exchange). Moment inequalities are used to infer state dependence from consumers’ switching choices in response to changes in product attributes. We infer much smaller switching costs on the health insurance exchange than is inferred from standard logit and/or random effects methods. A counterfactual policy evaluation illustrates that the policy implications of this difference can be substantive.

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