On the Over-Provision of Medical Insurance

Afrasiab Mirza () and Eric Stephens ()
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Afrasiab Mirza: Department of Economics, University of Birmingham, https://www.birmingham.ac.uk/staff/profiles/business/mirza-afrasiab
Eric Stephens: Department of Economics, Carleton University, https://carleton.ca/economics/people/stephens-eric/

No 25-02, Carleton Economic Papers from Carleton University, Department of Economics

Abstract: This paper considers the general equilibrium implications of moral hazard in private health insurance markets. We show that the structure of standard contracts gives rise to a pecuniary externality whereby individuals ignore the impact of their insurance purchases on the future price of care. At the equilibrium, individuals over-insure against health expenditure risk, and over-spend on medical services while facing an excessive price of care. Reducing insurance coverage at the margin can mitigate the externality by exerting downward pressure on prices, thereby raising welfare.

JEL-codes: D52 I11 I13 I18 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2024-12-22
New Economics Papers: this item is included in nep-hea
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Published: Carleton Economics Working Papers

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