Moral Hazard (L9)

Question 1

moral hazard

Answer 1

tendency for insurance against loss to reduce incentives to prevent or minimize the cost of loss.

Question 2

ex ante moral hazard

Answer 2

behavior changes that occur before an insured event happens and make that event more likely. (ex. leaving the stove on, skipping the flu vaccine)

Question 3

ex post moral hazard

Answer 3

behavior changes that occur after an insured event happens and make recovering from that event more expensive. (ex. using expensive drugs instead of generics, knee replacement surgery instead of painkillers)

Question 4

What determines price distortion?

Answer 4

function of the completeness of the insurance. 
The fuller the insurance, the greater the price distortion

Question 5

What determines price sensitivity?

Answer 5

depends mostly on the nature of the risk being insured, and how controllable it is (Consider Huntington’s disease vs heart attacks)

Question 6

Conditions for moral hazard

Answer 6

1. The cost of a risky or wasteful action to an individual is reduced, usually as a consequence of insurance.
2. Asymmetric information prevents an insurer from adequately pricing the action.
3. That individual responds to the price distortion by changing his behavior—either by taking more risks or demanding more covered goods and services.

Question 7

What can limit moral hazard?

Answer 7

1. Cost-sharing (Co-insurance, Copayments, Deductibles)

2. Monitoring