Estimating the Tradeoff between Risk Protection and Moral Hazard with a Nonlinear Budget Set Model of Health Insurance.” NBER Working Paper 18108

Insurance induces a well-known tradeoff between the welfare gains from risk protection and the welfare losses from moral hazard. Empirical work traditionally estimates each side of this tradeoff separately, potentially yielding mutually inconsistent results. I develop a nonlinear budget set model of health insurance that allows me to estimate both sides of this tradeoff jointly, allowing for a relationship between moral hazard and risk protection. An important feature of this model is that it considers nonlinearities in the consumer budget set that arise from deductibles, coinsurance rates, and stoplosses that lessen moral hazard as well as risk protection relative to full insurance. Within my empirical context of health insurance plans offered by a large firm, results suggest that on average, the deadweight losses from moral hazard substantially outweigh the welfare gains from risk protection. There is considerable variation in the estimated tradeoff across individuals