July 10, 2018
"In-kind Transfers, Tagging, and Market Power: Evidence from the ACA"
Public welfare programs have a long history of linking their benefits to observable characteristics of potential recipients, such as age, income, or employment status. We argue that this common mechanism, /tagging/, whose goal it is to improve efficiency with better targeting of in-kind transfers, may lead to substantial market distortions in an environment where the final good is provided to recipients by strategic private firms. The efficiency losses may be exacerbated when the level of transfers that subsidize the purchase of the good is anchored to the price information supplied by these firms. We explore this possibility empirically, using data on Health Insurance Marketplaces that were created in 2014 under the Affordable Care Act. We build a model of supply and demand in this new market. The estimated model primitives allow us to analyze the efficiency of market equilibria and the incidence of subsidies under the observed subsidy regime with tagging, as well as under counterfactual subsidization mechanisms.