Gaynor M, Haas-Wilson D & Vogt W, (2000)

‘Are Invisible Hands Good Hands?
Moral Hazard, Competition, and the 2nd Best in Health Care Markets’

Journal of Political Economy 108 (5), pp. 992-1005

• Critically evaluates the ‘folk theorem of health economics’ – that imperfect competition is desirable in healthcare markets because of the presence of moral hazard.
• The argument against competition runs as follows: when individuals have health insurance, they will tend to over-consume healthcare (moral hazard). Imperfect competition, which increases the price of treatments, will limit this moral hazard, and so increase welfare (an example of a ‘second best’ outcome).
• The authors model the optimal amount of health insurance and competition, given risk aversion and moral hazard.
• They establish that the existence of moral hazard is not, per se, an argument against competition, provided insurance markets are also competitive.
• Thus the authors conclude that the existence of moral hazard does NOT justify lax antitrust enforcement in health care markets.
  

Top of Page