Price and Income Effects in Insurance

Abstract

Abstract This chapter reviews the studies that demonstrate the importance of the income effect in insurance. These studies represent the findings of surveys, empirical analyses, and theoretical work. The chapter also includes a section that discusses unintended impact of policies designed to reduce moral hazard and the welfare of moral hazard if viewed as a transactions cost. It also includes a section on the demand for insurance that covers the loss of consumer products by their replacement. An appendix discusses the RAND Health Insurance Experiment, as its findings have had an outsized influence on policy. It suggests that rather than a gold standard study, attrition from the experiment by participants in the cost-sharing arms who became ill has biased the RAND results and is responsible for the finding that cost-sharing could be imposed with no substantial effect on health.