A Note on Health Insurance under Ex Post Moral Hazard
In the linear coinsurance problem, examined first by Mossin (1968), a higher absolute risk aversion with respect to wealth in the sense of Arrow–Pratt implies a higher optimal coinsurance rate. We show that this property does not hold for health insurance under ex post moral hazard; i.e., when illness severity cannot be observed by insurers, and policyholders decide on their health expenditures. The optimal coinsurance rate trades off a risk-sharing effect and an incentive effect, both related to risk aversion.
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- Amy Finkelstein & Erzo F. P. Luttmer & Matthew J. Notowidigdo, 2013.
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