Abstract
Giving consumers choice can improve welfare in principle. In this study, we explore choice optimality in a health insurance market that allows for variations in coverage but is standardized otherwise, theoretically implying optimal conditions for observing welfare improvements from choice. However, we find that as much as 49 percent of the adult population opts into non-welfare maximizing plans. In a laboratory experimental setting, we estimate treatment effects of increasing transparency through information provision and restricting choice on choice optimality. We find that decision quality cannot be improved meaningfully by our interventions and that non-optimal choice is economically relevant as it accounts for approximately 9.4 percent of total annual health costs. We suggest several policy changes in light of our findings.
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