Coexistence of Private and Public Health Care: Some Implications for Demand and Resource Allocation

Abstract

The coexistence of a private and a public health care system influences the total allocation of resources to health care in an economy. The present analysis focuses on the impact of an exogenous public supply policy on individual agents’ demand for private health care. Structurally the analysis is very simple, and it is embedded in a quite standard moral hazard model where individual agents maximize the expected utility of treatment within a stochastic medical technology. The strength of this approach is that the model is tractable, and it generates strong, and empirically testable, restrictions on the coefficients of the reduced forms. Furthermore, the analysis provides a framework that supports intuition on the relationship between a public and a private health care system.