Report On Moral Hazard

Part 1: Annotated Bibliography

First article: “Moral hazard and the composition of transfers: theory and evidence from cross-border transfers”
The article shed light on how the relationship between the restricted transfers and the moral hazard behavior of the recipient. The article attempt to determine how the restricted transfers can be used to control the moral hazard behaviors and how the composition of the restricted and unrestricted transfers can be adjusted with respect to the moral hazard of the recipient. The authors analyzed this research by use of empirical data on cross-border transfers. The model predicted that the there is a positive correlation between the restricted transfers and the moral hazard behavior of the recipient (Amegashie et al. p.281).

Second article: “Moral hazard, adverse selection, and health expenditures: A semiparametric analysis”

The article utilizes the theoretical models to predict how asymmetric information may generate inefficient outcome in the health care insurance markets. The article elucidates the empirical problem to distinguish between the moral hazard and adverse selection in the health care consumption. The authors used the two-step semiparametric estimation approach to determine how the asymmetric information affects the healthcare market (Bajari et al. 2014, p754). The result suggested that the ineffective control for income effects may result to overemphasize the magnitude of the moral hazard.

Part 2: Differences and similarities of the articles

Both articles show how the concept of the moral hazard limits the utilization of the resources of certain subjects. According to the first article, the authors reveals how the moral hazard affects the allocation of the cash transfers by the donors. In other words, the article explains that the decline in the moral hazard behaviors significantly reduces the proposition of the restricted transfers by the donor. The recipient must have a sufficient moral hazard to entice the donor to give an adequate proportion of the restricted transfers (Amegashie et al. p.289). Similarly, the second article illustrates that the moral hazard behaviors reduce the efficiency in the health care consumption. Here, the authors identify the main moral hazard as the overconsumption that increases the cost of the health care (Bajari et al. 2014, p761). The consumers are allocated the same resources that had previously consumed in both aggregate and health care consumption. As a result, this overconsumption results in inefficiency in the health insurance market.
The fundamental intention of the authors of both articles is to show that inadequate moral hazard result to inefficiency in the allocation of the resources, i.e. restricted transfer cash and the health care consumption. Similarly, the two article show how the information asymmetry affects the moral behavior. In the first article, when the donor has incomplete information the composition of transfer is anticipated to change in response to a change in the moral hazard behavior. Similarly, the asymmetric information may adversely affect the health insurance market as a result of the moral hazard and adverse selection.
However, the concept of the moral hazard in both article is explained from different perspectives; although means the same thing. In the first article, the factors that affect the moral hazard include the corruption, income, allocation of public goods, and the foreign aid consumption. These are identified as the main determinant of the moral hazard and consequently affects the allocation of the restricted cash transfers. On the other hand, the second article identifies the determinants of the moral hazard as the counterfactual. According to Bajari et al. (2014, p761), the counterfactual “allocates to the consumer the same resources previously consumed in both health care and aggregate consumption, but now allow the consumers to choose a new allocation.” However, both example provides the fundamental principle of moral hazard that reduces inefficiency. In other words, because there are subjects (health insurance and donors) that bears the risks, the individuals tends to take more risk such as overconsumption and corruption.
In order to test the models of the data, both articles utilize both theoretical and empirical data analysis. In other words, the two articles conducts research from the experiment, existing observation and experience and the data based on the principles and ideas. For instance, the first article applied the empirical date through the cross-border transfers using the variables in the foreign aid literature. In addition, the authors used the theoretical model to indicate a negative relationship between the quantities of project aid and the recipient state’s quality of governance. The article used the unbalanced sample of 62 aid recipient countries for the period of 1991 to 2007 (Amegashie et al. p.289). In this case, both regression and econometric analysis were conducted for estimation of the results.
On the other hand, the second article applied both the empirical, theoretical data analysis. The theoretical model provides the literature that shows how the asymmetric information leads to inefficiencies in the insurance market. The article also utilized the empirical analysis through samples of 14,635 Preferred Provider Organization and the Health Maintenance Organization from 2002 to 2004 (Bajari et al. 2014, p.754). The empirical analysis indicated that it is impossible to distinguish the moral hazards and the adverse selection in the health care consumption. However, contrary to the first article, the second article utilized the two-step semiparametric estimation approach. This model helped the researchers to estimate the structural model of the demand for the health care consumption.

References

Amegashie, J. A., Ouattara, B., & Strobl, E. 2013. Moral hazard and the composition of transfers: theory and evidence from cross-border transfers. Economics of Governance, 14(3), 279-301. DOI 10.1007/s10101-013-0123-4
Bajari, P., Dalton, C., Hong, H., & Khwaja, A. 2014. Moral hazard, adverse selection, and health expenditures: A semiparametric analysis. The RAND Journal of Economics, 45(4), 747-763.