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Journal of Risk and Uncertainty

, Volume 47, Issue 2, pp 147–163 | Cite as

Arrow’s theorem of the deductible: Moral hazard and stop-loss in health insurance

  • Jacques H. Drèze
  • Erik SchokkaertEmail author
Article

Abstract

The logic of Arrow’s theorem of the deductible, i.e. that it is optimal to focus insurance coverage on the states with largest expenditures, remains at work in a model with ex post moral hazard. The optimal insurance contract takes the form of a system of “implicit deductibles”, resulting in the same indemnities as a contract with full insurance above a variable deductible positively related to the elasticity of medical expenditures with respect to the insurance rate. In a model with a predefined ceiling on expenses, there is no reimbursement for expenses below the stop-loss amount. One motivation to have some insurance below the deductible arises if regular health care expenditures in a situation of standard health have a negative effect on the probability of getting into a state with large medical expenses.

Keywords

Optimal health insurance Deductible Stop-loss Moral hazard 

JEL Classification

I13 

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Copyright information

© Springer Science+Business Media New York 2013

Authors and Affiliations

  1. 1.CORE, Université Catholique de LouvainLouvain-la-NeuveBelgium
  2. 2.Department of EconomicsKU LeuvenLeuvenBelgium

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