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Severity of illness and the welfare effects of moral hazard


  • Joseph Eisenhauer



The extent to which the moral hazard caused by health insurance represents economic inefficiency has been the subject of much debate. This paper incorporates health status in a model of moral hazard, and finds that seriously ill patients are likely to exhibit greater moral hazard than healthier patients but the proportion of moral hazard that is inefficient declines with the severity of illness. Because of these competing tendencies, the cost of resource misallocation is parabolic in the severity of illness. The effect of the consumer’s initial wealth endowment is also considered. Copyright Springer Science+Business Media, LLC 2006

Suggested Citation

  • Joseph Eisenhauer, 2006. "Severity of illness and the welfare effects of moral hazard," International Journal of Health Economics and Management, Springer, vol. 6(4), pages 290-299, December.
  • Handle: RePEc:kap:ijhcfe:v:6:y:2006:i:4:p:290-299
    DOI: 10.1007/s10754-006-9006-3

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    References listed on IDEAS

    1. Pauly, Mark V. & Held, Philip J, 1990. "Benign moral hazard and the cost-effectiveness analysis of insurance coverage," Journal of Health Economics, Elsevier, vol. 9(4), pages 447-461, December.
    2. Pauly, Mark, 1983. "More on moral hazard," Journal of Health Economics, Elsevier, vol. 2(1), pages 81-85, March.
    3. Nyman, John A., 1999. "The economics of moral hazard revisited," Journal of Health Economics, Elsevier, vol. 18(6), pages 811-824, December.
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    Cited by:

    1. Gorsky, Martin & Guntupalli, Aravinda & Harris, Bernard & Hinde, Andrew, 2011. "The ‘cultural inflation of morbidity’ during the English mortality decline: A new look," Social Science & Medicine, Elsevier, vol. 73(12), pages 1775-1783.
    2. Wong, Irene O.L. & Lindner, Michael J. & Cowling, Benjamin J. & Lau, Eric H.Y. & Lo, Su-Vui & Leung, Gabriel M., 2010. "Measuring moral hazard and adverse selection by propensity scoring in the mixed health care economy of Hong Kong," Health Policy, Elsevier, vol. 95(1), pages 24-35, April.

    More about this item


    Health insurance; Moral hazard; Severity of illness; Marginal rate of substitution; I11; G22;

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies


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