Equilibrium in competitive insurance markets with ex ante adverse selection and ex post moral hazard

Abstract

Existence of pure strategy equilibria is studied in health insurance markets that exhibit both ex ante adverse selection of the Rothschild–Stiglitz–Wilson type, and ex post hidden information moral hazard. It is found that ex post moral hazard has two offsetting effects on the existence of equilibrium, and that in general it is difficult to say whether an equilibrium is more or less likely to exist. Numerical simulations, and an analytical example, confirm that moral hazard may increase the likelihood of equilibrium. These results are interpreted as evidence that Health Maintenance Organization (HMO) markets could be less likely to exhibit stable equilibria than are fee-for-service insurance markets.