Are Invisible Hands Good Hands? Moral Hazard, Competition, and the Second‐Best in Health Care Markets

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Abstract
The nature and normative properties of competition in health care markets have long been the subject of much debate. In this paper we consider what the optimal benchmark is in the presence of moral hazard effects on consumption due to health insurance. Intuitively, it seems that imperfect competition in the health care market may con- strain this moral hazard by increasing prices. We show that this in- tuition cannot be correct if insurance markets are competitive. A com- petitive insurance market will always produce a contract that leaves consumers at least as well off under lower prices as under higher prices.