Estimating the Tradeoff Between Risk Protection and Moral Hazard with a Nonlinear Budget Set Model of Health Insurance
Insurance induces a well-known tradeoff between the welfare gains from risk protection and the welfare losses from moral hazard. Empirical work traditionally estimates each side of the tradeoff separately, potentially yielding mutually inconsistent results. I develop a nonlinear budget set model of health insurance that allows for the calculation of both sides of the tradeoff simultaneously, allowing for a relationship between moral hazard and risk protection. An important feature of this model is that it considers nonlinearities in the consumer budget set that arise from deductibles, coinsurance rates, and stoplosses that alter moral hazard as well as risk protection relative to no insurance. I illustrate the properties of my model by estimating it using data on employer sponsored health insurance from a large firm. Within my empirical context, the average deadweight losses from moral hazard substantially outweigh the average welfare gains from risk protection. However, the welfare impact of moral hazard and risk protection are both small relative to transfers from the government through the tax preference for employer sponsored health insurance and transfers from some agents to other agents through a common premium.
I thank the following individuals for helpful comments: Joseph Altonji, C. Lanier Benkard, Steve Berry, John Beshears, Tom Chang, Victor Chernozhukov, Raj Chetty, Jesse Edgerton, Randy Ellis, Hanming Fang, Amy Finkelstein, Jason Fletcher, Michael Grossman, Jonathan Gruber, Ben Handel, Justine Hastings, Phil Haile, Jerry Hausman, Naomi Hausman, Kate Ho, Panle Jia, Jonathan Kolstad, Kory Kroft, Fabian Lange, Claudio Lucarelli, Will Manning, Costas Meghir, Whitney Newey, Chris Nosko, Matt Notowidigdo, Ariel Pakes, Mark Pauly, Stephen Ryan, Bernard Salanie, Paul Schrimpf, Larry Seidman, Hui Shan, Ebonya Washington, and Heidi Williams. I thank participants at the public nance seminar and the econometrics lunch at MIT and the junior faculty and summer faculty lunches at Yale for feedback on very early versions of this paper. I am also grateful for feedback from Columbia, the Cowles Summer Structural Micro Conference, the Econometric Society Summer and Winter Meetings, Harvard, Hunter College, the NBER Summer Institute, NYU IO Day, the University of North Carolina, the University of Virginia, the University of Illinois at Chicago, and the AEA annual meeting. Jean Roth and Mohan Ramanujan provided invaluable support at the NBER, and Brian Dobbins and Andrew Sherman provided invaluable support with the Yale University Faculty of Arts and Sciences High Performance Computing Center. Toby Chaiken provided excellent research assistance. The National Institute on Aging, Grant Number T32-AG00186, provided support for this project. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
Kowalski, Amanda E., 2015. "Estimating the tradeoff between risk protection and moral hazard with a nonlinear budget set model of health insurance," International Journal of Industrial Organization, Elsevier, vol. 43(C), pages 122-135. citation courtesy of