The Theory of the Demand for Health Insurance
2001-03
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The Theory of the Demand for Health Insurance
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2001-03
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Center for Economic Research, Department of Economics, University of Minnesota
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Working Paper
Abstract
Conventional theory holds that moral hazard--the additional health care purchased as a
result of becoming insured--is an opportunistic price response and is welfare-decreasing because
the value of the additional health care purchased is less than its costs. The theory of the demand
for health insurance presented here suggests that moral hazard is primarily an income transfer
effect. In an estimation based on parameters from the literature, the value of moral hazard
consumption is found to be 3 times greater than its costs, suggesting that income transfer effects
dominate price effects and that moral hazard is welfare-increasing.
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Nyman, J., (2001), "The Theory of the Demand for Health Insurance", Discussion Paper No. 311, Center for Economic Research, Department of Economics, University of Minnesota.
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