Are Invisible Hands Good Hands? Moral Hazard, Competition, and the Second-Best in Health Care Markets
Martin S. Gaynor
Carnegie Mellon University; National Bureau of Economic Research (NBER); Leverhulme Centre for Market and Public Organisation
William B. Vogt
RAND Corporation; National Bureau of Economic Research (NBER)
Journal of Political Economy, Vol. 108, No. 5, 2000
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
Date posted: September 7, 2000
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