Moral Hazard Induced Unraveling: Theory and Evidence from the Affordable Care Act *

54 Pages Posted: 10 Sep 2016 Last revised: 24 Jun 2024

See all articles by Cameron Ellis

Cameron Ellis

University of Iowa - Department of Finance

Meghan Esson

University of Iowa

Eli Liebman

University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics

Date Written: March 31, 2019

Abstract

We identify and quantify a new form of welfare loss in insurance markets. We first show theoretically that moral hazard from subsidies for cost-sharing combined with community rating mimics adverse selection and can unravel insurance markets. To quantify the potential welfare loss, we use exogenous variation in the number of subsidized enrollees on the ACA exchanges. We find that subsidy-induced moral hazard led to higher premiums, which has lowered enrollment among the unsubsidized by 7.6 percentage points. We estimate the welfare costs of this "moral hazard induced unraveling" to be around 25% of the welfare loss from existing adverse selection.

Keywords: D82, D60, G22, I13, I18 Market Failure, Moral Hazard, Insurance, Asymmetric Information, Unraveling

JEL Classification: I13, I18, I38, G22

Suggested Citation

Ellis, Cameron and Esson, Meghan and Liebman, Eli, Moral Hazard Induced Unraveling: Theory and Evidence from the Affordable Care Act * (March 31, 2019). Available at SSRN: https://ssrn.com/abstract=2836866 or http://dx.doi.org/10.2139/ssrn.2836866

Cameron Ellis (Contact Author)

University of Iowa - Department of Finance ( email )

Iowa City, IA 52242-1000
United States

Meghan Esson

University of Iowa ( email )

Iowa City, IA 52242-1000
United States

Eli Liebman

University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics ( email )

Athens, GA 30602-6254
United States

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