Contract enforcement and preventive healthcare: Theory and evidence

Abstract

I study how enforcement frictions in health insurance contracts determine the distribution of preventive care. I show that when contracts are weakly enforced, insurers underinvest in preventive care to perpetuate the need for insurance. This mechanism is self-enforcing, whereby low levels of prevention today breed low levels of prevention in the future. In contrast, I show that dynamic contracts that are perfectly enforced do not feature such history dependence. Leveraging these results, I devise a test to show that the hypothesis of limited commitment cannot be rejected in the data.