The Theory of the Demand for Health Insurance

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The Theory of the Demand for Health Insurance

Published Date

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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Previously Published Citation

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.

Suggested citation

Nyman, John. (2001). The Theory of the Demand for Health Insurance. Retrieved from the University Digital Conservancy, https://hdl.handle.net/11299/55878.

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