La lengua de los Sonetos a Orfeo

In the 1960s, most moral hazard models took the constrained utility maximization approach. These models were enormously simplified since they investigated only the first-order condition in the comparative static framework. With the Lagrangian method, the moral hazard issue is particularly difficult to analyze. However, an extensive literature has been developed since then.

Arrow (1963) first analyzed the special economic problems of medical care by comparing the characteristics of the medical care industry with those of other industries. He treated the economic problems of medical care as identical choice under uncertainty with respect to the incidence of illness and the effectiveness of medical treatment. He described moral hazard as a problem of insurance and discussed the effect of insurance on incentives. Specifically, he examined an individual’s incentive to consume additional health care services because of the reduced marginal cost for the patient the health insurance has provided.

Pauly (1968) argued that individuals covered by insurance are rational in seeking more health care services. He stated that the moral hazard problem has little to do with morality and should be analyzed by traditional economic tools, i.e., the moral hazard problem could be reduced most effectively by establishing and optimal set of deductibles and coinsurance.

24

The contributions of Arrow and Pauly have strongly influenced the development of the theory of moral hazard. From these two papers, many researchers and economists have attempted to expand the theory of moral hazard within the health care context.

The first formal model of moral hazard was that of Zeckhauser (1970) in which he discussed the choice of an insurance policy for medical expenditures, with solutions computed using first-order conditions. In addition, he suggested that the primary purpose of medical insurance is to spread the risk of incurring substantial medical expense. With risk spreading, individuals would not have to pay the full amount of expense. Insurance provision would introduce an incentive toward over-expenditure if the insured had substantial influence over the amount that is spent on their own behalf in any particular medical circumstance. The level of reimbursement by the insurance plan is positively related to the expenses incurred by the insured. The papers above did no more than deriving first-order conditions for the general (linear) case. It was not until Blomqvist’s (1997) paper, where the elasticity of demand for health services in excess of the necessary amount was used to determine the first- order condition in a non-linear model. The results he found suggested that the welfare losses from the government subsidy to employer-financed health insurance under the US tax system is smaller than previously estimated by using a linear model. In addition, Bajari et al. (2006) proposed a theoretical non-linear model based on Blomqvist (1997) to estimate a structural model of consumer demand for health insurance and medical utilization.

3.1.2 Demand for health care

Consumer uncertainty about illness and the associated losses will lead to a demand for health insurance. Because of the difficulty in knowing the exact nature of illness and the

25

appropriate treatment, there is asymmetrical information between the consumer and the insurer, leading to moral hazard. People covered by health insurance may also affect the demand for health care because insurance distorts the effective price that people pay to obtain health services as a result people may overuse resources in medical care Manning et al. (1987).

Feldstein (1973) stated that demand for insurance is not the same as the demand for health care. Health insurance is purchased not as a final consumption good but as a means of paying for the future purchases of health services. In addition, people who have health insurance may affect the demand for health care. Grossman (1972) used a human capital approach to explain individual- level demand for health care. According to Grossman’s theory, individuals invest in themselves through their own health in order to increase their earnings, they do not receive utility from medical services directly, but only through their positive effects on health. In Grossman’s theoretical model, individuals derive utility from consumption, good health, and leisure. Health is determined by both medical inputs and lifestyle behaviors. Lifestyle inputs are measured by the amount of time spent on healthy behaviors such as exercise. Health insurance affects the individual’s budget constraint by lowering the price of medical care. The individual faces a health shock every period that is realized after he makes his insurance decision, but before he chooses health inputs. For each period, an individual maximizes his lifetime utility by choosing the level of medical care and amount of time spent on lifestyle behaviors subject to a per period budget constraint and a time constraint.

Phelps (1973) stressed the simultaneity of the demand for health insurance and demand for health care. When purchasing insurance, the individual considers what effects that insurance will have on his demand for health care; and when actually buying health care, he or she considers the amount of insurance as a determinant of his actual medical service consumption.

26

Cameron et al. (1988) developed a model of joint decision by people to buy health insurance and medical care. The authors used a reduced form to estimate the demand for health insurance and stated that the structural parameters can be estimated by medical treatment decision.

Folland et al. (2004) found that health insurance might lead to excessive use of health care and the presence of insurance can also affect the probability of the event happening. An insured person may not make the same effort to prevent the illness as an uninsured person. Moral hazard occurs because the insurer cannot observe and monitor behaviors. Ehrlich and Chuma (1990), in their model of demand function of longevity (or quantity of life), showed that the demand for health and health care must be derived in conjunction with that for longevity and the related consumption plan, and all that choices depend on individual’s initial endowment and different conditions. Their comparative dynamics predictions indicated that optimal health and longevity are increasing functions of endowed wealth, and that improvements in opportunities to produce health can accentuate the differences between the endowed wealth and the attained longevity levels.