Disentangling Adverse Selection, Moral Hazard and Supply Induced Demand: An Empirical Analysis of the Demand for Healthcare Services

66 Pages Posted: 29 Jun 2016 Last revised: 31 Oct 2018

See all articles by Vincenzo Atella

Vincenzo Atella

University of Rome Tor Vergata - Centre for International Studies on Economic Growth (CEIS); Department of Economics and Finance; University of Rome Tor Vergata - Faculty of Economics

Alberto Holly

University of Lausanne

Alessandro Mistretta

Bank of Italy

Date Written: May 1, 2016

Abstract

In the healthcare sector, Selection (S), Moral Hazard (MH) and Supply Induced Demand (SID) are three very important phenomena affecting patients' behavior. Despite there exists a vast theoretical and empirical literature on these phenomena, so far, no contribution has been able to approach them jointly. This is mostly due to difficulties in modelling the joint determinants of health service utilization and health insurance choice by means of a tractable structural simultaneous equation model. In this paper, we provide a solution to this problem and estimate a simultaneous four equation structural model with four latent variables, where the first two equations are meant to deal with the adverse selection issue, while the third and fourth equation deal with moral hazard and SID issues. By doing so, our model seeks to identify causal effects while correcting for selection and endogeneity with the observational data we have. A closed form solution for the likelihood function - which guarantees an exact solution - is maximized via FIML, using a large cross-sectional dataset collected by the Italian national institute of statistic (ISTAT). The empirical analysis has con rmed the theoretical predictions of our structural model. In particular, we find evidence of selection in the choice of private insurance and SID, but do not find MH behavior on the patient side. These results are extremely important from a health policy perspective, given the existing international debate on the development of a second pillar in the fi nancing of the healthcare system.

Keywords: Quadrivariate Probit, FIML, Supply Induced Demand, Moral Hazard, Adverse Selection, Health Insurance

JEL Classification: I13, I11, D82, C35

Suggested Citation

Atella, Vincenzo and Holly, Alberto and Mistretta, Alessandro, Disentangling Adverse Selection, Moral Hazard and Supply Induced Demand: An Empirical Analysis of the Demand for Healthcare Services (May 1, 2016). CEIS Working Paper No. 389, Available at SSRN: https://ssrn.com/abstract=2801679 or http://dx.doi.org/10.2139/ssrn.2801679

Vincenzo Atella (Contact Author)

University of Rome Tor Vergata - Centre for International Studies on Economic Growth (CEIS) ( email )

Via Columbia, 2
Rome, I-00133
Italy
+39 06 72595648 (Phone)

Department of Economics and Finance ( email )

Via Columbia 2
Roma, 00133
Italy

University of Rome Tor Vergata - Faculty of Economics ( email )

Via Columbia n.2
I-00133 Rome, 00133
Italy
+39 06 72595635 (Phone)
+30 06 2020 500 (Fax)

HOME PAGE: http://www.economia.uniroma2.it/sefemeq/professori/atella/

Alberto Holly

University of Lausanne ( email )

CH-1015 Lausanne
Switzerland

Alessandro Mistretta

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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