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On the Over-Provision of Medical Insurance

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Abstract

This paper considers the general equilibrium implications of moral hazard in private health insurance markets. We show that the structure of standard contracts gives rise to a pecuniary externality whereby individuals ignore the impact of their insurance purchases on the future price of care. At the equilibrium, individuals over-insure against health expenditure risk, and over-spend on medical services while facing an excessive price of care. Reducing insurance coverage at the margin can mitigate the externality by exerting downward pressure on prices, thereby raising welfare.

Suggested Citation

  • Afrasiab Mirza & Eric Stephens, 2024. "On the Over-Provision of Medical Insurance," Carleton Economic Papers 25-02, Carleton University, Department of Economics.
    • Handle: RePEc:car:carecp:25-02
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    File URL: https://carleton.ca/economics/wp-content/uploads/cewp25-02.pdf
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    More about this item

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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