The Social Determinants of Choice Quality: Evidence from Health Insurance in the Netherlands

Joint with Jonathan Kolstad, Thomas Minten, and Johannes Spinnewijn

Policy makers increasingly offer choice or rely on markets for the provision of impure public goods like insurance, retirement savings or education. Though choice allows for improved surplus from matching individuals to appropriate products, prior work in these markets has documented choice frictions that have the potential to unwind or even reverse these benefits. We use rich administrative data on health insurance choices, health care utilization and myriad socio-demographic factors for the entire country of the Netherlands to study how insurance deductible choice quality relates to these factors. We document that choice quality is low on average but that there is a striking choice quality gradient with respect to socio-economic status. Individuals with higher education levels and more analytic degrees or professions make markedly better decisions, holding constant other key potential factors. Income, net worth, and liquidity are associated with better choices, though to a smaller degree than education. We exploit panel data on individuals’ colleagues, neighbors and family members to estimate the causal impacts of peers and one’s environment on choices. We find strong impacts on choice quality along each of these three dimensions and show that peer effects accelerate inequality in the sense that more positively influential peer effects are correlated with higher education and income levels. We use our estimates to model the consumer surplus effects of different counterfactual scenarios related to (i) smart defaults and (ii) menu design.