The other ex-ante moral hazard in health

Jay Bhattacharya

"It is well known that public or pooled insurance coverage can induce a form of ex-ante moral hazard: people make inefficiently low investments in self-protective activities. This paper points out another ex-ante moral hazard that arises through an induced innovation externality. This alternative mechanism, by contrast, causes people to devote an inefficiently high level of self-protection. As an empirical example of this externality, we analyze the innovation induced by the obesity epidemic. Obesity is associated with an increase in the incidence of many diseases. The induced innovation hypothesis is that an increase in the incidence of a disease will increase technological innovation specific to that disease. The empirical economics literature has produced substantial evidence in favor of the induced innovation hypothesis.We first estimate the associations between obesity and...