TY - JOUR AU - Gaynor,Martin AU - Haas-Wilson,Deborah AU - Vogt,William B. TI - Are Invisible Hands Good Hands? Moral Hazard, Competition, and the Second Best in Health Care Markets JF - National Bureau of Economic Research Working Paper Series VL - No. 6865 PY - 1998 Y2 - December 1998 UR - http://www.nber.org/papers/w6865 L1 - http://www.nber.org/papers/w6865.pdf N1 - Author contact info: Martin Gaynor Heinz College Carnegie Mellon University 4800 Forbes Avenue,,Room 3008 Pittsburgh, PA 15213-3890 Tel: 412/268-7933 Fax: 412/268-5338 E-Mail: mgaynor@cmu.edu William B. Vogt 513 Brooks Hall Department of Economics Terry College of Business University of Georgia Athens, GA 30602 Tel: 706-542-3970 Fax: 706-542-3376 E-Mail: william.b.vogt@gmail.com AB - The nature, and normative properties, of competition in health care markets has long been the subject of much debate. In particular, policymakers have exhibited a great deal of reservation toward competition in health care markets, as demonstrated by the plethora of regulations governing the health care sector. Currently, as consolidation rapidly occurs in health care markets, concern about reduced competition has arisen. This concern, however, cannot be properly evaluated without a normative standard. In this paper we consider what the optimal benchmark is in the presence of moral hazard effects on consumption due to health insurance. Moral hazard is widely recognized as one of the most important distortions in health care markets. Moral hazard due to health insurance leads to excess consumption, therefore it is not obvious that competition is second best optimal given this distortion. Intuitively, it seems that imperfect competition in the health care market may constrain this moral hazard by increasing prices. We show that this intuition cannot be correct if insurance markets are competitive. A competitive insurance market will always produce a contract that leaves consumers at least as well off under lower prices as under higher prices. Thus, imperfect competition in health care markets can not have efficiency enhancing effects if the only distortion is due to moral hazard. ER -