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The incentive for prevention in public health Systems

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Abstract

This paper examines the effect of moral hazard on public health insurance contract. It models primary prevention in a two period model with classification risk. Agent’s preferences appear to play an important role in the optimal determination of preventive effort and insurance between generations. If absolute prudence is larger than twice absolute risk aversion, moral hazard increases intergenerational insurance and classification risk. This highlights a tradeoff between prevention and insurance arising from classification risk. An increase in the difference between prudence and twice risk aversion (that we define as the degree of “protectiveness”) moreover makes public insurance contracts more stable (when competing with spot insurance) if the cost of prevention is low enough when agents preferences exhibit CRRA. Under a formulated utility function with linear reciprocal derivative, we finally show that an increase in agent’s degree of “protectiveness” enhances the stability of public insurance and the extent of intergenerational insurance.

Suggested Citation

  • Renaud Bourlès, 2010. "The incentive for prevention in public health Systems," IDEP Working Papers 1001, Institut d'economie publique (IDEP), Marseille, France, revised 17 Feb 2010.
  • Handle: RePEc:iep:wpidep:1001
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    More about this item

    Keywords

    Public health insurance; Classification risk; Moral Hazard; Prudence.;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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