Working Paper: NBER ID: w3316
Authors: Richard Arnott; Joseph Stiglitz
Abstract: This paper shows that, except in certain limiting cases, competitive equilibrium with moral hazard is constrained inefficient. The first section compares the competitive equilibrium and the constrained social optimum in a fairly general model, and identifies types of market failure. Each of the subsequent sections focuses on a particular market failure.
Keywords: moral hazard; market failure; Pareto improvement; insurance
JEL Codes: D82; G22; H21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| moral hazard (G52) | constrained inefficiencies in competitive equilibrium (D61) |
| risk-averse individuals obtaining insurance (G52) | reduced incentives for care (G52) |
| reduced incentives for care (G52) | inefficiencies (D61) |
| individual behavior (D01) | market outcomes (P42) |
| pecuniary externalities (D62) | market failures (D52) |
| quantity of insurance purchased observable (G52) | different inefficiencies in presence of moral hazard (D82) |
| government action (H11) | market efficiency (G14) |
| competitive equilibrium is inefficient (D59) | need for interventions (I24) |