Are Invisible Hands Good Hands? Moral Hazard, Competition, and the Second-Best in Health Care Markets

Posted: 7 Sep 2000  

Martin S. Gaynor

Carnegie Mellon University; National Bureau of Economic Research (NBER); Leverhulme Centre for Market and Public Organisation

Deborah Haas-Wilson

Smith College

William B. Vogt

RAND Corporation; National Bureau of Economic Research (NBER)

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Abstract

The nature, and normative properties, of competition in health care markets has long been the subject of much debate. In this paper we consider what the optimal benchmark is in the presence of moral hazard effects on consumption due to health insurance. Intuitively, it seems that imperfect competition in the health care market may constrain this moral hazard by increasing prices. We show that this intuition cannot be correct if insurance markets are competitive. A competitive insurance market will always produce a contract that leaves consumers at least as well off under lower prices as under higher prices.

JEL Classification: D8, L1, I11, L4, D6, D4

Suggested Citation

Gaynor, Martin S. and Haas-Wilson, Deborah and Vogt, William B., Are Invisible Hands Good Hands? Moral Hazard, Competition, and the Second-Best in Health Care Markets. Journal of Political Economy, Vol. 108, No. 5, 2000. Available at SSRN: https://ssrn.com/abstract=238408

Martin S. Gaynor (Contact Author)

Carnegie Mellon University ( email )

H. John Heinz III School of Public Policy
and Management
Pittsburgh, PA 15213-3890
United States
412-268-7933 (Phone)
412-268-5338 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Leverhulme Centre for Market and Public Organisation

12 Priory Road
Bristol BS8 1TN
United Kingdom

Deborah Haas-Wilson

Smith College ( email )

Department of Economics
Northampton, MA 01060
United States
413-585-3636 (Phone)
413-585-3635 (Fax)

William B. Vogt

RAND Corporation ( email )

1776 Main Street
P.O. Box 2138
Santa Monica, CA 90407-2138
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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