The Other Ex-Ante Moral Hazard in Health

52 Pages Posted: 19 Mar 2008 Last revised: 20 May 2021

See all articles by Jay Bhattacharya

Jay Bhattacharya

Stanford University - Center for Primary Care and Outcomes Research; National Bureau of Economic Research (NBER)

Mikko Packalen

University of Waterloo - Department of Economics

Date Written: March 2008

Abstract

It is well known that public or pooled insurance coverage can induce a form of ex-ante moral hazard: people make inefficiently low investments in self-protective activities. This paper points out another ex-ante moral hazard that arises through an induced innovation externality. This alternative mechanism, by contrast, causes people to devote an inefficiently high level of self-protection. As an empirical example of this externality, we analyze the innovation induced by the obesity epidemic. Obesity is associated with an increase in the incidence of many diseases. The induced innovation hypothesis is that an increase in the incidence of a disease will increase technological innovation specific to that disease. The empirical economics literature has produced substantial evidence in favor of the induced innovation hypothesis.We first estimate the associations between obesity and disease incidence. We then show that if these associations are causal and the pharmaceutical reward system is optimal the magnitude of the induced innovation externality of obesity roughly coincides with the Medicare-induced health insurance externality of obesity. The current Medicare subsidy for obesity therefore appears to be approximately optimal. We also show that the pattern of diseases for obese and normal weight individuals are similar enough that the induced innovation externality of obesity on normal weight individuals is positive as well.

Suggested Citation

Bhattacharya, Jayanta and Packalen, Mikko, The Other Ex-Ante Moral Hazard in Health (March 2008). NBER Working Paper No. w13863, Available at SSRN: https://ssrn.com/abstract=1106589

Jayanta Bhattacharya (Contact Author)

Stanford University - Center for Primary Care and Outcomes Research ( email )

Center for Health Policy
179 Encina Commons
Stanford, CA 94305-6019
United States
650-736-0404 (Phone)
650-723-1919 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Mikko Packalen

University of Waterloo - Department of Economics ( email )

Waterloo, Ontario N2L 3G1
Canada

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