Moral Hazard - Professor Melissa Mcinerney. PDF

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Professor Melissa Mcinerney. detailed notes on the course topics needed for exams and assignments...

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Overview Monday, 2 November 2020

10:13 PM

It is the tendency for insurance against loss to reduce incentives to prevent or minimize the cost of loss Eg, people take more risk because they have more insurance/ they take more meds cause they know they have the insurance Moral- risky changes in behaviour that happen due to insurance and not something natural like a lightening strike or something of the sort Likelihood of bad event happening to individual is X, and individuals actions can increase or decrease the likelihood of this event happening Insurance will help pay some or all cost of x Thus they don’t feel all the consequences of their actions and price for the individual is lower As a response to this price distortion the individual changes his behaviour in a manner that increases chance of x but the insurer is unaware of this due to information asymetry and insurance company cant see the behaviour change Instance of moral hazard must include -price distortion -price sensitive (consumers have to be) -asymetric info (insurance company cant observe behaviour change otherwise they would have involved that in the contract to discourage it) Ante moral hazard; behaviour changes that occur before an insured event happens and make that event more likely, eg taking health risks Post moral hazard; behaviour changes that occur after an event happens and make recovering more expensive Eg,using more expensive health care bc you are insured

Graphing Moral Hazard Assymetric info cannot be shown on graph Social loss can be shown Graph for health care use Downward sloping demand indicates the consumers are price sensitive

P= MC Mc mb of behaviour is socially optimum With insurance- the price is lowered Price getting lower illustrates the price distortion Thus price distortion is vertical distance between uninsured price and post insurance price Flatter- more elastic demand curve - larger the social loss Social loss - area where overconsuming relative to the social optimum and for which the social costs exceed the benefits Downward sloping demand curve- benefits of consumption Increase in qty of risky behaviour is the overconsumption Social loss is a result of ex ante moral hazard/ risky behaviours Social loss is for the units overconsumed Larger price sensisitivity and price distortion = more social loss The greater the price distortion, the more damaging is each extra bit of price sensitivity The greater the price sensitivity , the more costly is each marginal increase in price distortion...