The terms adverse selection and moral hazard are well known within the field of health economics. But what is “selection on moral hazard”? Amy Finkelstein explains using the following analogy:
In the context of an all-you-can eat restaurant, traditional selection is that people with big appetites are more likely to go to all-you-can-eat restaurants. Selection on moral hazard is the idea that even if you have an average appetite, you know that when food is free on the margin–the marginal price of an additional entree is zero at an all-you-can-eat restaurant–you’re going to consume a lot more than you usually do when things are priced a la carte. So people who tend to eat a lot tend to eat a lot more when the price of food is lower also find an all-you-can-eat restaurant appealing. Selection on moral hazard is thus selection on the slope, or on the price sensitivity of demand, ratherthan “traditional” selection on the intercept, or the level of demand.
But does this type of thing happen in real life. Finkelstein and co-authors (2013) use data from Alcoa’s employee’s health insurance options, choices and medical claims and found that individuals who were more likely to increase their use of health care services when the price is low are also the ones who are most likely to choose plans with lower cost-sharing. In fact, Finkelstein claims that selection on moral hazard “…was almost as important as traditional adverse selection” in plan selection.
- Amy Finkelstein. Moral hazard in health insurance. 2015.