Genetic testing with primary prevention and moral hazard1

We develop a model where a free genetic test reveals whether the individual tested has a low or high probability of developing a disease. A costly prevention e¤ort allows high-risk agents to decrease the probability of developing the disease. Agents are not obliged to take the test, but must disclose its results to insurers. Insurers o¤er separating contracts which take into account the individual risk, so that taking the test is associated to a discrimination risk. We study the individual decisions to take the test and to undertake the prevention e¤ort as a function of the e¤ort cost and of its e¢ ciency. We obtain that, if e¤ort is observable by insurers, agents undertake the test only if the e¤ort cost is neither too large nor too low. If the e¤ort cost is not observable by insurers, they face a moral hazard problem which induces them to under-provide insurance. We obtain the counterintuitive result that moral hazard increases the value of the test if the e¤ort cost is low enough. Also, agents may perform the test for lower levels of prevention e¢ ciency when e¤ort is not observable. JEL Codes: D82,G22, I18.