Optimal commodity taxation with moral hazard and unobservable outcomes.
The optimal public insurance-taxation scheme is derived for a model with unobservable outcomes. If the government can only observe aggregate commodity expenditures, reimbursement insurance is constrained-efficient. However, two distortions accompany the reimbursement scheme. First, consumers are induced to take (forego) actions which increase (decrease) the likelihood of adverse outcomes (i.e., ex ante moral hazard). Second, reimbursement insurance creates a subsidy distortion (i.e., ex post moral hazard). Ex ante moral hazard calls for taxation (subsidization) of commodities which increase (decrease) the probability of adverse outcomes. The second distortion calls for taxation (subsidization) of commodities which are sufficiently strong complements to (substitutes for) the insured commodity. An example centered on cigarettes and medical insurance is presented.
Russo
Gerard
G
University of Hawaii, Department of Economics, Saunders Hall, Room 515B, 2424 Maile Way, Honolulu, HI 98822, USA. russo@hawaii.edu
D005249:Fees and Charges / Q000706:statistics & numerical data*; D015438:Health Behavior; D006801:Humans; D007349:Insurance, Health, Reimbursement / Q000706:statistics & numerical data*; D017059:Models, Econometric; D009014:Morals; D017063:Outcome Assessment, Health Care; D016016:Proportional Hazards Models; D040242:Risk Reduction Behavior; D012907:Smoking / Q000191:economics* / Q000331:legislation & jurisprudence / Q000523:psychology; D000074606:Smoking Prevention; D013660:Taxes / Q000331:legislation & jurisprudence / Q000706:statistics & numerical data*; D014481:United States