Center for Economic Research, Department of Economics, University of Minnesota
This paper presents theory that an important source of value is missing from conventional
theory of the demand for health insurance, namely, the effect of the transfer of income (from
those who purchase insurance and remain healthy to those who purchase insurance and become
ill) on purchases of medical care. Because the portion of moral hazard that is attributable to
income is welfare increasing and would replace some of moral hazard that is spuriously deemed
to be welfare decreasing, the new theory suggests that the value of health insurance has been
dramatically undervalued. Implications for policy are outlined.
Health Insurance Theory: The Case of the Vanishing Welfare Gain.
Center for Economic Research, Department of Economics, University of Minnesota.
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