Asian Journal of Economics and Empirical Research

Standard insurance theory expects that expenditures and coverage should be positively correlated, for two main reasons: first, high risky individuals prefer to choose a more generous coverage (selection effect); second, a more extensive coverage may increase health costs (incentive effect). We try to empirically separate the selection effect and incentive effect on the health care expenditures with a novel Chinese dataset. With our estimation, we do find the evidences of selection effect, but fail to find the incentive effect. Besides, we also find some evidences of Physician-Induced Demand.