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The Other Ex-Ante Moral Hazard in Health

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  • Jay Bhattacharya
  • Mikko Packalen

Abstract

It is well known that public or pooled insurance coverage can induce a form of ex-ante moral hazard: people make inefficiently low investments in self-protective activities. This paper points out another ex-ante moral hazard that arises through an induced innovation externality. This alternative mechanism, by contrast, causes people to devote an inefficiently high level of self-protection. As an empirical example of this externality, we analyze the innovation induced by the obesity epidemic. Obesity is associated with an increase in the incidence of many diseases. The induced innovation hypothesis is that an increase in the incidence of a disease will increase technological innovation specific to that disease. The empirical economics literature has produced substantial evidence in favor of the induced innovation hypothesis. We first estimate the associations between obesity and disease incidence. We then show that if these associations are causal and the pharmaceutical reward system is optimal the magnitude of the induced innovation externality of obesity roughly coincides with the Medicare-induced health insurance externality of obesity. The current Medicare subsidy for obesity therefore appears to be approximately optimal. We also show that the pattern of diseases for obese and normal weight individuals are similar enough that the induced innovation externality of obesity on normal weight individuals is positive as well.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13863.

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Date of creation: Mar 2008
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Publication status: published as Bhattacharya, Jay & Packalen, Mikko, 2012. "The other ex ante moral hazard in health," Journal of Health Economics, Elsevier, vol. 31(1), pages 135-146.
Handle: RePEc:nbr:nberwo:13863

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  1. Jay Bhattacharya & Mikko Packalen, 2008. "The Other Ex-Ante Moral Hazard in Health," NBER Working Papers 13863, National Bureau of Economic Research, Inc.
  2. Waldfogel, Joel, 2003. " Preference Externalities: An Empirical Study of Who Benefits Whom in Differentiated-Product Markets," RAND Journal of Economics, The RAND Corporation, vol. 34(3), pages 557-68, Autumn.
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  9. Jay Bhattacharya & Neeraj Sood, 2005. "Health Insurance and the Obesity Externality," NBER Working Papers 11529, National Bureau of Economic Research, Inc.
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  26. Jay Bhattacharya & Mikko Packalen, 2008. "Is Medicine an Ivory Tower? Induced Innovation, Technological Opportunity, and For-Profit vs. Non-Profit Innovation," NBER Working Papers 13862, National Bureau of Economic Research, Inc.
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Cited by:
  1. Michael Grossman & Naci H. Mocan, 2011. "Introduction to "Economic Aspects of Obesity"," NBER Chapters, in: Economic Aspects of Obesity, pages 1-16 National Bureau of Economic Research, Inc.
  2. Bhattacharya, Jay & Packalen, Mikko, 2011. "Opportunities and benefits as determinants of the direction of scientific research," Journal of Health Economics, Elsevier, vol. 30(4), pages 603-615, July.
  3. Yilma, Zelalem & van Kempen, Luuk & de Hoop, Thomas, 2012. "A perverse ‘net’ effect? Health insurance and ex-ante moral hazard in Ghana," Social Science & Medicine, Elsevier, vol. 75(1), pages 138-147.
  4. Mikko Packalen & Jay Bhattacharya, 2010. "The Other Ex-Ante Moral Hazard in Health," Working Papers 1015, University of Waterloo, Department of Economics, revised Dec 2010.
  5. Jay Bhattacharya & Mikko Packalen, 2008. "Is Medicine an Ivory Tower? Induced Innovation, Technological Opportunity, and For-Profit vs. Non-Profit Innovation," NBER Working Papers 13862, National Bureau of Economic Research, Inc.
  6. Gilad Sorek, 2013. "Efficient Self-Protection and Progress in Curing-Technology," Auburn Economics Working Paper Series auwp2013-07, Department of Economics, Auburn University.

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