Search, Moral Hazard, and Price Dispersion

We study the effects of insurance coverage on consumer search behavior and the pricing of services covered by insurance, constructing a general equilibrium model of moral hazard in search with an endogenous price distribution. When an insured event occurs, households request quotes from firms, who offer a homogenous service at various prices. We show that lower coinsurance rates reduce the amount of search by households, allowing firms to increase their prices. Hence, moral hazard in search is far more costly than shown in previous models, which ignored equilibrium firm response to changes in consumer search behavior.