Moral hazard, adverse selection, and health expenditures: A semiparametric analysis

Theoretical models predict asymmetric information in health insurance markets may generate inefficient outcomes due to adverse selection and moral hazard. However, previous empirical research has found it difficult to disentangle adverse selection from moral hazard in health care. We empirically study this question by using data from the Health and Retirement Study to estimate a structural model of the demand for health insurance and medical care. Using a two-step semi-parametric estimation strategy we find significant evidence of moral hazard, but not of adverse selection. 1 ∗ We have benefited from the comments of Amy Finkelstein and participants of the Conference on Structural Models in Labor, Aging and Health, and the Seventeenth Annual Health Economics Conference. We acknowledge excellent research assistance from Ivan Shaliastovich, and especially Alvin Murphy. Bajari and Hong would like to thank the National Science Foundation for generous research support.