(Most) everyone is above average: Optimism bias and insurance nonparticipation

We examine health insurance nonparticipation using a behavioral framework that integrates optimism bias with institutional safety nets. In our model, optimistic consumers underestimate their probability of health shocks. We show that nonparticipation—even under subsidized premiums—is rationalized by the interaction between optimism and an implicit medical bankruptcy floor that limits financial downside for low‐wealth households. Testing these predictions with data from the Medical Expenditure Panel Survey, we create a proxy for optimism bias: the wedge between subjective health reports and objective clinical benchmarks. Consistent with theory, both lower income and higher optimism significantly depress insurance enrollment, with the behavioral friction concentrated among lower‐income households. Finally, because optimism bias positively predicts ex‐post healthcare expenditures across multiple care channels, our results are more consistent with a cognitive bias than private information.