Department of Economics Seminar Series
|Category:||College Of Arts And Sciences|
|Date & Time:||
from 02:00 PM to 03:00 PM
|Location:||Admin Building-Board of Trustee Room|
This study proposes an innovative incentive-based health insurance plan as a potential solution for correcting suboptimal level of prevention due to misperception of health-risks in developing economies. One common source of market failure--personal misperception of risk--is shown to be a potential explanation of why poor people in developing economies adopt sub-optimal level of prevention. A simple insurance plan that provides direct incentives for prudent use of care and personal forms of preventive effort is suggested as a potential solution to the problem. It has been shown in the analysis that in the absence of misperception of risk, the incentive-based plan achieves the first-best. When the agent's subjective risk-belief is different than the actual risk,the incentive-based plan achieves the second-best; and it is better than the conventional plan for all values of coinsurance rates (c). The analytical solution shows that the incentive-plan is the second best when the agent under-perceives the risk. However, it is not clear which plan is better when the agent over-estimates the risk. The simulation results show that the incentive-plan is indeed unambiguously better than the conventional plan when the agent under-perceives the risk. The simulation results also show that it depends on the value of c, which plan will be better when the agents over-perceive the risk. The incentive-plan can be a potential health insurance policy for poor economies, where the under-perception of risk is a potential problem and the health care market is underdeveloped due to limited resources. Uninsured people can be covered under this plan, which will correct three potential problems: lack of access to medical care, under investment in preventive effort due to misperception of health-risk and moral hazard. It will also reduce the cost of medical care as individuals will invest more for staying healthy.