Moral Hazard and Selection Among the Poor: Evidence from a Randomized Experiment

Abstract:     
Not only does economic theory predict high-risk individuals to be more likely to buy insurance, but insurance coverage is also thought to crowd out precautionary activities. In spite of stark theoretical predictions, there is conflicting empirical evidence on adverse selection, and evidence on ex ante moral hazard is very scarce. Using data from the Seguro Popular Experiment in Mexico, this paper documents patterns of adverse selection into health insurance as well as the existence of non-negligible ex ante moral hazard. More specifically, the findings indicate that (i) agents in poor self-assessed health prior to the intervention have, all else equal, a higher propensity to take up insurance; and (ii) insurance coverage reduces the demand for self-protection in the form of preventive care. Curiously, however, individuals do not sort based on objective measures of their health.

Number of Pages in PDF File: 35

Keywords: health insurance, adverse selection, moral hazard, Seguro Popular

JEL Classification: I11, D82, H51

working papers series