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The wealth effects of premium subsidies on moral hazard in insurance markets

Author

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  • Jaspersen, Johannes G.
  • Richter, Andreas

Abstract

Insurance premium subsidies are present in many insurance markets. The Swiss government, for example, paid out CHF 4.26 billion or 0.72% of the Swiss GDP for health insurance premium subsidies in 2011. Analyses of premium subsidies have often highlighted that the increased insurance demand due to premium subsidies increases the effects of moral hazard in the market. Other consequences of premium subsidies, however, have mostly been neglected by the literature. We show in our theoretical model that the wealth effects of premium subsidies decrease the sensitivity of the insured towards the monetary consequences of losses. This leads to less prevention efforts by the insured and thus increases moral hazard in the market. The effect is preserved if the subsidy is financed through proportional taxation. Using two alternative models, we show that providing state-dependent subsidies can either increase or reverse this effect, depending on which state subsidies are paid. We argue that whether demand effects or wealth effects of premium subsidies will dominate the insured׳s behavior depends on the market structure.

Suggested Citation

  • Jaspersen, Johannes G. & Richter, Andreas, 2015. "The wealth effects of premium subsidies on moral hazard in insurance markets," European Economic Review, Elsevier, vol. 77(C), pages 139-153.
  • Handle: RePEc:eee:eecrev:v:77:y:2015:i:c:p:139-153
    DOI: 10.1016/j.euroecorev.2015.03.007
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    References listed on IDEAS

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    Cited by:

    1. Gilad Sorek & David Benjamin, 2016. "Health insurance mandates in a model with consumer bankruptcy," Journal of Regulatory Economics, Springer, vol. 50(2), pages 233-250, October.
    2. repec:eee:pubeco:v:149:y:2017:i:c:p:47-58 is not listed on IDEAS
    3. Woodard, Joshua, 2016. "Estimation of Insurance Deductible Demand under Endogenous Premium Rates," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 236151, Agricultural and Applied Economics Association.
    4. repec:gam:jjrfmx:v:11:y:2018:i:4:p:75-:d:179193 is not listed on IDEAS

    More about this item

    Keywords

    Subsidization; Moral hazard; Insurance regulation;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • K20 - Law and Economics - - Regulation and Business Law - - - General
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law

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