The Behavioral Foundations of Default Effects: Theory and Evidence from Medicare Part D

Abstract

We show in two natural experiments that default rules in Medicare Part D have large, persistent effects on enrollment and drug utilization of low-income beneficiaries. The implications of this phenomenon for welfare and optimal policy depend on the sensitivity of passivity to the value of the default option. Using random assignment to default options, we show that beneficiary passivity is extremely insensitive, even when enrolling in the default option would result in substantial drug consumption losses. A third natural experiment suggests that variation in active choice is driven by random transitory shocks rather than the inherent attentiveness of some beneficiaries. (JEL D91, I13, I18, I38, L65)