Working Paper: NBER ID: w13863
Authors: Jay Bhattacharya; Mikko Packalen
Abstract: It is well known that public or pooled insurance coverage can induce a form of ex-ante moral hazard: people make inefficiently low investments in self-protective activities. This paper points out another ex-ante moral hazard that arises through an induced innovation externality. This alternative mechanism, by contrast, causes people to devote an inefficiently high level of self-protection. \n \nAs an empirical example of this externality, we analyze the innovation induced by the obesity epidemic. Obesity is associated with an increase in the incidence of many diseases. The induced innovation hypothesis is that an increase in the incidence of a disease will increase technological innovation specific to that disease. The empirical economics literature has produced substantial evidence in favor of the induced innovation hypothesis. \n \nWe first estimate the associations between obesity and disease incidence. We then show that if these associations are causal and the pharmaceutical reward system is optimal the magnitude of the induced innovation externality of obesity roughly coincides with the Medicare-induced health insurance externality of obesity. The current Medicare subsidy for obesity therefore appears to be approximately optimal. We also show that the pattern of diseases for obese and normal weight individuals are similar enough that the induced innovation externality of obesity on normal weight individuals is positive as well.
Keywords: Obesity; Moral Hazard; Health Economics; Innovation
JEL Codes: I10; O30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Obesity (I12) | Increase in disease incidence (I12) |
| Increase in disease incidence (I12) | Increase in technological innovation in pharmaceuticals (O39) |
| Obesity (I12) | Increase in technological innovation in pharmaceuticals (O39) |
| Induced innovation from obesity (O39) | Medicare-induced health insurance externality (H51) |
| Pattern of diseases for obese individuals (I12) | Positive induced innovation externality for normal weight individuals (D62) |