IDEAS home Printed from https://ideas.repec.org/p/wat/wpaper/1015.html
   My bibliography  Save this paper

The Other Ex-Ante Moral Hazard in Health

Author

Listed:
  • Mikko Packalen

    (Department of Economics, University of Waterloo)

  • Jay Bhattacharya

    (Stanford University School of Medicine)

Abstract

It is well known that pooled insurance coverage can induce a form of ex-ante moral hazard: people make inefficiently low investments in self-protective activities. This paper identifies another ex-ante moral hazard that runs in the opposite direction: it causes people to choose inefficiently high levels of self-protection. This other ex-ante moral hazard arises through the impact that self-protective activities have on the reward for innovation. Lower levels of self-protection and the associated chronic conditions and behavioral patterns such as obesity, smoking, and malnutrition increase the incidence of many diseases for an individual. This increases the individual's consumption of treatments to those diseases, which increases the reward for innovation that an innovator receives. By the induced innovation hypothesis, which has broad empirical support, the increase in the reward for innovation in turn increases the rate of innovation, which benefits all consumers. As individuals do not take these positive externalities on the innovator and other consumers into account when deciding the level of self-protective activities, they each invest an inefficiently high level in self-protective activities. In the quantitative part of our analysis we show that for obesity the magnitude of this positive innovation externality roughly coincides with the magnitude of the negative Medicare-induced health insurance externality of obesity. The other ex-ante moral hazard that we identify can thus be as important as the ex-ante moral hazard that has been a central concept in health economics for decades. The quantitative finding also implies that the current Medicare-induced subsidy for obesity is approximately optimal. Thus the presence of this obesity subsidy is not a sufficient rationale for "soda taxes", "fat taxes" or other penalties on obesity.

Suggested Citation

  • Mikko Packalen & Jay Bhattacharya, 2010. "The Other Ex-Ante Moral Hazard in Health," Working Papers 1015, University of Waterloo, Department of Economics, revised Dec 2010.
  • Handle: RePEc:wat:wpaper:1015
    as

    Download full text from publisher

    File URL: http://economics.uwaterloo.ca/documents/10-015MP.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Michael Spence, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Oxford University Press, vol. 43(2), pages 217-235.
    2. Patrick Bajari & Han Hong & Ahmed Khwaja, 2006. "Moral Hazard, Adverse Selection and Health Expenditures: A Semiparametric Analysis," NBER Working Papers 12445, National Bureau of Economic Research, Inc.
    3. Jay Bhattacharya & M. Kate Bundorf & Noemi Pace & Neeraj Sood, 2011. "Does Health Insurance Make You Fat?," NBER Chapters, in: Economic Aspects of Obesity, pages 35-64, National Bureau of Economic Research, Inc.
    4. Nicholas Bloom & Mark Schankerman & John Van Reenen, 2013. "Identifying Technology Spillovers and Product Market Rivalry," Econometrica, Econometric Society, vol. 81(4), pages 1347-1393, July.
    5. Waldfogel, Joel, 2003. "Preference Externalities: An Empirical Study of Who Benefits Whom in Differentiated-Product Markets," RAND Journal of Economics, The RAND Corporation, vol. 34(3), pages 557-568, Autumn.
    6. Beate Sander & Rito Bergemann, 2003. "Economic burden of obesity and its complications in Germany," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 4(4), pages 248-253, December.
    7. 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 251-277, June.
    8. Bhattacharya, Jay & Bundorf, M. Kate, 2009. "The incidence of the healthcare costs of obesity," Journal of Health Economics, Elsevier, vol. 28(3), pages 649-658, May.
    9. Daron Acemoglu & Joshua Linn, 2004. "Market Size in Innovation: Theory and Evidence from the Pharmaceutical Industry," The Quarterly Journal of Economics, Oxford University Press, vol. 119(3), pages 1049-1090.
    10. Darius Lakdawalla & Neeraj Sood, 2007. "The Welfare Effects of Public Drug Insurance," NBER Working Papers 13501, National Bureau of Economic Research, Inc.
    11. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    12. David Popp, 2002. "Induced Innovation and Energy Prices," American Economic Review, American Economic Association, vol. 92(1), pages 160-180, March.
    13. Frank R. Lichtenberg & Joel Waldfogel, 2003. "Does Misery Love Company? Evidence from pharmaceutical markets before and after the Orphan Drug Act," NBER Working Papers 9750, National Bureau of Economic Research, Inc.
    14. Bhattacharya, Jay & Packalen, Mikko, 2012. "The other ex ante moral hazard in health," Journal of Health Economics, Elsevier, vol. 31(1), pages 135-146.
    15. Lakdawalla, Darius & Sood, Neeraj, 2013. "Health insurance as a two-part pricing contract," Journal of Public Economics, Elsevier, vol. 102(C), pages 1-12.
    16. Jay Bhattacharya & M. Kate Bundorf, 2005. "The Incidence of the Healthcare Costs of Obesity," NBER Working Papers 11303, National Bureau of Economic Research, Inc.
    17. Pierre-Carl Michaud & Dana Goldman & Darius Lakdawalla & Yuhui Zheng & Adam Gailey, 2009. "Understanding the Economic Consequences of Shifting Trends in Population Health," NBER Working Papers 15231, National Bureau of Economic Research, Inc.
    18. Amy Finkelstein, 2004. "Static and Dynamic Effects of Health Policy: Evidence from the Vaccine Industry," The Quarterly Journal of Economics, Oxford University Press, vol. 119(2), pages 527-564.
    19. Jay Bhattacharya & Neeraj Sood, 2005. "Health Insurance and the Obesity Externality," NBER Working Papers 11529, National Bureau of Economic Research, Inc.
    20. Spence, Michael, 1976. "Product Differentiation and Welfare," American Economic Review, American Economic Association, vol. 66(2), pages 407-414, May.
    21. Richard G. Newell & Adam B. Jaffe & Robert N. Stavins, 1999. "The Induced Innovation Hypothesis and Energy-Saving Technological Change," The Quarterly Journal of Economics, Oxford University Press, vol. 114(3), pages 941-975.
    22. Yin, Wesley, 2008. "Market incentives and pharmaceutical innovation," Journal of Health Economics, Elsevier, vol. 27(4), pages 1060-1077, July.
    23. Jay Bhattacharya & Mikko Packalen, 2008. "Is Medicine an Ivory Tower? Induced Innovation, Technological Opportunity, and For-Profit vs. Non-Profit Innovation," NBER Working Papers 13862, National Bureau of Economic Research, Inc.
    24. Lisa George & Joel Waldfogel, 2003. "Who Affects Whom in Daily Newspaper Markets?," Journal of Political Economy, University of Chicago Press, vol. 111(4), pages 765-784, August.
    25. Ehrlich, Isaac & Becker, Gary S, 1972. "Market Insurance, Self-Insurance, and Self-Protection," Journal of Political Economy, University of Chicago Press, vol. 80(4), pages 623-648, July-Aug..
    26. Dranove, David, 1998. "Is there underinvestment in R & D about prevention?," Journal of Health Economics, Elsevier, vol. 17(1), pages 117-127, January.
    27. Inas Rashad & Sara Markowitz, 2007. "Incentives in Obesity and Health Insurance," NBER Working Papers 13113, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Frankovic, Ivan & Kuhn, Michael, 2018. "Health insurance, endogenous medical progress, and health expenditure growth," ECON WPS - Vienna University of Technology Working Papers in Economic Theory and Policy 01/2018, Vienna University of Technology, Institute for Mathematical Methods in Economics, Research Group Economics (ECON).
    2. Bhattacharya, Jay & Packalen, Mikko, 2011. "Opportunities and benefits as determinants of the direction of scientific research," Journal of Health Economics, Elsevier, vol. 30(4), pages 603-615, July.
    3. Botkins, Elizabeth Robison, 2015. "Does Health Insurance Encourage Obesity? A Moral Hazard Study," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 206228, Agricultural and Applied Economics Association.
    4. Jay Bhattacharya & Mikko Packalen, 2008. "Is Medicine an Ivory Tower? Induced Innovation, Technological Opportunity, and For-Profit vs. Non-Profit Innovation," NBER Working Papers 13862, National Bureau of Economic Research, Inc.
    5. Pichler, Stefan & Ziebarth, Nicolas R., 2017. "The pros and cons of sick pay schemes: Testing for contagious presenteeism and noncontagious absenteeism behavior," Journal of Public Economics, Elsevier, vol. 156(C), pages 14-33.
    6. Gilad Sorek, 2013. "Efficient Self-Protection and Progress in Curing-Technology," Auburn Economics Working Paper Series auwp2013-07, Department of Economics, Auburn University.
    7. Stefan Pichler & Nicolas R. Ziebarth, 2015. "The Pros and Cons of Sick Pay Schemes: Testing for Contagious Presenteeism and Shirking Behavior," Discussion Papers of DIW Berlin 1509, DIW Berlin, German Institute for Economic Research.
    8. Bhattacharya, Jay & Packalen, Mikko, 2012. "The other ex ante moral hazard in health," Journal of Health Economics, Elsevier, vol. 31(1), pages 135-146.
    9. Pichler, Stefan & Ziebarth, Nicolas R., 2015. "The Pros and Cons of Sick Pay Schemes: A Method to Test for Contagious Presenteeism and Shirking Behavior," IZA Discussion Papers 8850, Institute of Labor Economics (IZA).
    10. Barton H. Hamilton & Andrés Hincapié & Robert A. Miller & Nicholas W. Papageorge, 2018. "Innovation and Diffusion of Medical Treatment," NBER Working Papers 24577, National Bureau of Economic Research, Inc.
    11. Michael Grossman & Naci H. Mocan, 2011. "Introduction to "Economic Aspects of Obesity"," NBER Chapters, in: Economic Aspects of Obesity, pages 1-16, National Bureau of Economic Research, Inc.
    12. Yilma, Zelalem & van Kempen, Luuk & de Hoop, Thomas, 2012. "A perverse ‘net’ effect? Health insurance and ex-ante moral hazard in Ghana," Social Science & Medicine, Elsevier, vol. 75(1), pages 138-147.

    More about this item

    JEL classification:

    • I10 - Health, Education, and Welfare - - Health - - - General
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wat:wpaper:1015. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sherri Anne Arsenault). General contact details of provider: http://edirc.repec.org/data/dewatca.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.