The recipient of the 2012 Witt Award was Casey Rothschild, from Wellesley College, for “The Efficiency of Categorical Discrimination in Insurance Markets,” JRI June 2011, Vol. 78 #2, pp. 267-285.
Abstract
Crocker and Snow (1986) show that banning categorization based on risk-related characteristics such as gender or race in pricing insurance policies is inefficient whenever categorization is costless. Their analysis, by contrast, suggests ambiguous welfare effects of banning costly categorization. I show that this latter conclusion is incorrect: categorical pricing bans are inefficient even when categorization is costly. Whenever the ban-imposing government can instead provide breakeven partial social insurance, it can remove its ban in such a way that the insurance market will choose to employ the categorizing technology only when doing so is Pareto improving.