Moral hazard in public health policies

Kangoh Lee

Applied Economics, 2024, vol. 56, issue 57, 8039-8057

Abstract: This paper studies the role of medical preparedness in the incentive of policymakers to protect their constituents against public health risks during the COVID-19 pandemic. Mitigation measures such as stay-at-home orders reduce health risks but result in economic losses. The goal is to examine moral hazard in determining the stringency of mitigation measures theoretically and empirically. Theoretical analysis shows that measures tend to be more lenient in better medically-prepared jurisdictions with higher hospital capacity, implying moral hazard in public health policies. The paper then empirically tests the theoretical prediction based on data on statewide stay-at-home orders across 50 states during the COVID-19 pandemic, and empirical evidence shows that one additional hospital bed per 10,000 population decreases the duration of the order by 1.8 days, lending support to the theoretical prediction. To avoid moral hazard, independent health experts should be part of the policy-making body.

Date: 2024
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DOI: 10.1080/00036846.2023.2289923

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