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Inflation as a Strategic Response

  • M. Martin Boyer
  • Pierre Thomas Léger

In this paper, we examine the effect of increases in health care costs and general inflation on optimal insurance policies and waste in a model of imperfect information with costly auditing. We show that in such a setting, individuals will buy more than full insurance. Moreover, as the cost of medical increases, consumers (i.e., patients) reduce their probability of filing injustified claims, at the same time as insurance providers audit with lower probability. As a result, waste associated with costly auditing is reduced. We also show that a general increase in the opportunity cost of illness (reflected through lost wages due to illness) also decreases the likelihood of false claims, of auditing and thus of waste, but not as much as health care costs increase. Nous étudions dans ce document de recherche l'impact d'une augmentation des coûts des soins de santé et de l'inflation en général sur le contrat optimal d'assurance médicale et sur le gaspillage dans une économie où les agents-consommateurs possèdent une information privilégiée et où le principal-assureur doit encourir des coûts d'audit pour vérifier l'information des agents. Nous montrons dans cet article que les agents seront plus que pleinement assurés au sens où l'indemnité reçue est plus grande que la perte encourue. De plus, au fur et à mesure que le coût des soins de santé augmente, les agents réduisent leur probabilité de demander des soins de santé injustifiés, alors que le principal réduit sa probabilité d'audit. En conséquence, le gaspillage associé aux audits onéreux diminue. Nous montrons finalement qu'une augmentation dans le coût de la vie en général (que nous approximons par une augmentation des pertes de salaire encourues à cause de la maladie) réduit également le gaspillage associé aux audits,0501s dans une mesure moindre qu'une augmentation du coût des soins de santé.

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Paper provided by CIRANO in its series CIRANO Working Papers with number 2001s-26.

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Length: 23 pages
Date of creation: 01 Apr 2001
Date of revision:
Handle: RePEc:cir:cirwor:2001s-26
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  1. Khalil, Fahad & Parigi, Bruno M, 1998. "Loan Size as a Commitment Device," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(1), pages 135-50, February.
  2. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
  3. Joseph P. Newhouse, 1992. "Medical Care Costs: How Much Welfare Loss?," Journal of Economic Perspectives, American Economic Association, vol. 6(3), pages 3-21, Summer.
  4. Gale, Douglas & Hellwig, Martin, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Wiley Blackwell, vol. 52(4), pages 647-63, October.
  5. M. Martin Boyer, 2004. "Overcompensation as a Partial Solution to Commitment and Renegotiation Problems: The Case of "Ex Post" Moral Hazard," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 71(4), pages 559-582.
  6. Patricia M. Danzon, 1991. "Liability for Medical Malpractice," Journal of Economic Perspectives, American Economic Association, vol. 5(3), pages 51-69, Summer.
  7. Blomqvist, Ake, 1997. "Optimal non-linear health insurance," Journal of Health Economics, Elsevier, vol. 16(3), pages 303-321, June.
  8. Manning, Willard G, et al, 1987. "Health Insurance and the Demand for Medical Care: Evidence from a Randomized Experiment," American Economic Review, American Economic Association, vol. 77(3), pages 251-77, June.
  9. Mookherjee, Dilip & Png, Ivan, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 399-415, May.
  10. Picard, Pierre, 1996. "Auditing claims in the insurance market with fraud: The credibility issue," Journal of Public Economics, Elsevier, vol. 63(1), pages 27-56, December.
  11. Boyer, M Martin, 2000. " Insurance Taxation and Insurance Fraud," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 2(1), pages 101-34.
  12. Bond, Eric W. & Crocker, Keith J., 1997. "Hardball and the soft touch: The economics of optimal insurance contracts with costly state verification and endogenous monitoring costs," Journal of Public Economics, Elsevier, vol. 63(2), pages 239-264, January.
  13. Blomqvist, A. G. & Carter, R. A. L., 1997. "Is health care really a luxury?," Journal of Health Economics, Elsevier, vol. 16(2), pages 207-229, April.
  14. David Dranove & Mark Shanley & Carol Simon, 1992. "Is Hospital Competition Wasteful?," RAND Journal of Economics, The RAND Corporation, vol. 23(2), pages 247-262, Summer.
  15. Dranove, David, 1988. "Demand Inducement and the Physician/Patient Relationship," Economic Inquiry, Western Economic Association International, vol. 26(2), pages 281-98, April.
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