The Economic Consequences of Bankruptcy Reform (with Tal Gross, Feng Liu, Matthew Notowidigdo, and Jialan Wang) Job Market Paper.
Abstract: A generous consumer bankruptcy system provides partial insurance against financial risks faced by households, but it may also raise the cost of credit to consumers. We study this trade-off using a large reform to the U.S. bankruptcy code which raised the cost of filing for bankruptcy and reduced the benefits of filing for many consumers. We find that the reform significantly reduced aggregate bankruptcy filings. Using a combination of administrative records, proprietary market-research data, and credit reports, we estimate pass-through to borrowing costs and the consequences for the insurance value of bankruptcy. We estimate that a one-percentage-point reduction in filing risk within a credit score segment translates to a 67 basis-point decline in the offered interest rate for unsecured credit. Based on a simple model of interest rate setting, this represents approximately 73% pass-through relative to a perfect competition benchmark. After the reform, large negative financial shocks---in particular, uninsured hospitalizations---are less than half as likely to be discharged through bankruptcy. Overall, we find that reducing the generosity of the bankruptcy code lowered interest rates at the cost of reducing the insurance value of the bankruptcy system.
Information Frictions and Insurer Plan Design: Evidence from Medicare Advantage (with Evan Mast)
Abstract: Behavioral frictions in insurance exchanges affect not only the plan a consumer selects, but also the menu of plans insurers offer. We investigate an information friction in Medicare Advantage—beneficiaries pay two premiums, and one is much more salient. We find a larger demand elasticity for the salient versus non-salient premium. A model of insurer plan design produces simulated premiums matching the observed distribution using these “behavioral” elasticities, but not when assuming equal elasticities across the two premiums. Removing the friction increases enrollment in low-premium plans, increasing consumer surplus $5 per year with supply fixed and $73 per year when including a supply response.
Research in Progress
Accelerating Demand for Auto Insurance: Prepaid Flexible Contracts and Willingness-to-Pay for Lower Liquidity Requirements In the field. AEA Pre-registration.
Abstract: Despite a universal insurance mandate, 30 million drivers in the United States do not carry the minimum automobile insurance required by law. Traditional contracts pool high and low frequency drivers and require large upfront payments to enroll. High upfront premiums may make these contracts unappealing to low income drivers, who also drive fewer miles on average. We introduce a flexible "prepaid" auto insurance contract designed to increase take-up among uninsured drivers by lowering liquidity requirements and charging drivers an incremental premium per day of driving. We randomize auto insurance contract offers to uninsured drivers in California (where 15% of drivers lack insurance), varying the flexibility of the contract (traditional versus prepaid), the price of coverage, and quantity discounts for longer coverage terms. The design tests the potential of flexible prepaid contracts to increase insurance take-up among uninsured drivers, estimates willingness-to-pay for lower liquidity requirements, and explores potential barriers to insurance take-up.
The Burden of Medical Debt and the Impact of Debt Forgiveness (with Neale Mahoney, Francis Wong, and Wesley Yin) In the field. Summary on J-PAL Website. AEA Pre-registration 1 (Old Debt). AEA Pre-registration 2 (New Debt).
Abstract: Medical debt is potentially a large burden for many Americans—with 44 million individuals holding an aggregate $75 billion in medical debt. While these nominal amounts are staggering, it is unclear to what extent medical debt harms financial well-being. Medical debt recovery rates are low, suggesting that the pure “balance sheet” cost of medical debt is modest for most individuals. Yet medical debt may harm individuals through lower credit scores, higher interest rates, and reduced access to credit—impairing economic opportunities and perhaps even locking individuals in “debt traps.” Collaborating with RIP Medical Debt, a non-profit that buys and abolishes medical debt, researchers will implement a randomized-control trial to study the impact of medical debt. Medical debt will be forgiven for randomly chosen “treated” individuals, whose financial outcomes will be compared to otherwise similar “control” individuals for whom medical debt will not be forgiven.
Press Coverage of Intervention: New York Times
The Effects of Financial Assistance Policies on Health and Health Care Utilization (with Neale Mahoney, Francis Wong, and Wesley Yin)
Abstract: American households owe $75 billion in medical debt. Health care providers are increasingly concerned that medical debt may harm patient health – both through the stress of the debt and because indebted patients may be reluctant to seek additional health care – and are establishing financial assistance programs to address the issue. In this project, we are working with a large managed care organization to study the impacts of a financial assistance program. Our research design uses a discontinuity in program eligibility to study the effects of the financial assistance on health care utilization and health, and to inform the design and targeting of financial assistance policies.