Adapting to Capitalism: Private Health Insurance Uptake Among Former East Germans

I study the differential reaction of former East and West Germans to a series of health care reforms that started in 1997. Along with the gradual decrease in coverage under the public health insurance system, former East Germans were significantly less likely to sign complementary health insurance contracts in the private market. I show that the differential uptake rates of additional private insurance after the reforms are consistent with a model in which agents optimize their individual insurance status only if they are aware of the organizational form of the health care system (or more generally the welfare state), and in which East Germans are initially less likely to have the correct beliefs, but learn over time that institutions have changed and they are now responsible for optimizing their insurance coverage. While it is widely recognized that the development of new institutions in transition economies takes time, people's adjustment to them has received little attention. This study provides evidence for the existence of a substantial transition period in the individual adaptation to new institutions.

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A Policy Brief about this research can be found here.