Estimating the Heterogeneous Welfare Effects of Choice Architecture: An Application to the Medicare Prescription Drug Insurance Market

We develop a structural model for estimating the welfare effects of policies that alter the design of differentiated product markets when some consumers may be misinformed about product characteristics. We use the model to analyze three proposals to simplify Medicare markets for prescription drug insurance: (1) reducing the number of plans, (2) providing personalized information, and (3) changing defaults so consumers are reassigned to cheaper plans. First we combine national administrative and survey data to determine which consumers appear to make informed enrollment decisions. Then we analyze the welfare effects of each proposal, using the revealed preferences of informed consumers to proxy for the concealed preferences of misinformed consumers. Results suggest that the menu reduction would harm most consumers whereas personalized information and reassignment would benefit most consumers. Each policy produces large gains and losses for small groups of consumers, but no policy changes average consumer welfare by more than 19% of average expenditures.