The wealth effects of premium subsidies on moral hazard in insurance markets

Johannes G. Jaspersen and Andreas Richter

European Economic Review, 2015, vol. 77, issue C, 139-153

Abstract: Insurance premium subsidies are present in many insurance markets. The Swiss government, for example, paid out CHF 4.26 billion or 0.72% of the Swiss GDP for health insurance premium subsidies in 2011. Analyses of premium subsidies have often highlighted that the increased insurance demand due to premium subsidies increases the effects of moral hazard in the market. Other consequences of premium subsidies, however, have mostly been neglected by the literature. We show in our theoretical model that the wealth effects of premium subsidies decrease the sensitivity of the insured towards the monetary consequences of losses. This leads to less prevention efforts by the insured and thus increases moral hazard in the market. The effect is preserved if the subsidy is financed through proportional taxation. Using two alternative models, we show that providing state-dependent subsidies can either increase or reverse this effect, depending on which state subsidies are paid. We argue that whether demand effects or wealth effects of premium subsidies will dominate the insured׳s behavior depends on the market structure.

Keywords: Subsidization; Moral hazard; Insurance regulation (search for similar items in EconPapers)
JEL-codes: D82 G22 H24 K20 K34 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:77:y:2015:i:c:p:139-153

DOI: 10.1016/j.euroecorev.2015.03.007

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