John Nyman and the Economics of Health Care Moral Hazard

Abstract

In 2003, John Nyman published The Theory of Demand for Health Insurance. His principal contributions are (1) to replace the previously unexamined axiom of risk avoidance with the axiom of welfare maximization; (2) to uncover a misinterpretation in the literature on moral hazard, namely, the insurance payoff as a price reduction, rather than as an income transfer. The immediate consequence of these reformulations is to recognize insurance-induced health care utilization as resulting in an increase in social welfare. Despite its evident validity and enormous implications, Nyman’s work has received very little attention or recognition in the health economics literature.