Industrial Organization Grad Student Seminar

Speaker: Alex Boche

Title: Dynamic Health Insurance with Moral Hazard and Adverse Selection

Abstract:
I theoretically study optimal dynamic health insurance under evolving risk with both adverse selection and (ex-post) moral hazard. My model has interpretations both as a private dynamic health insurance contract and as a static social health insurance program featuring a participation mandate. I first show that, when restricting to linear coinsurance and assuming no wealth effects, the coinsurance for high-risk types is distorted to be more generous than would be statically efficient. This distortion relaxes upward incentive constraints for low-risk types, thereby allowing for greater cross-subsidization from low-risk to high-risk types, which is important for insuring dynamic risk. I then give sufficient conditions under which the optimal menu of linear contracts contains distinct coverage-levels for each risk-type (i.e. separation versus pooling). Finally, I solve for the optimal menu of nonlinear coinsurance schedules, both with and without wealth effects, under the first-order approach.

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