Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 409: A median voter model of health insurance with ex post moral hazard

Johanna Jacob and Douglas Lundin
Additional contact information
Johanna Jacob: Department of Economics, Uppsala University
Douglas Lundin: Dept. of Economics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, S-113 83 Stockholm, Sweden

Abstract: One of the main features of health insurance is moral hazard, as defined by Pauly (1968); people face incentives for excess utilization of medical care since they do not pay the full marginal cost for provision. To mitigate the moral hazard problem, a coinsurance can be included in the insurance contract. We analyze under what conditions there is a conflict between individuals on what coinsurance rate should be set with public health insurance, and we establish conditions for a median-voter equilibrium. Then we allow the public insurance to be supplemented with private insurance, and we establish conditions under which public provision will lead to larger aggregate spending than private provision does.

Keywords: health insurance; moral hazard; public provision; median voter

JEL-codes: H42; I18

35 pages, October 31, 2000

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