Moral Hazard and Background Risk in Competitive Insurance Markets
AbstractWe examine the effect of background risk on competitive insurance markets with moral hazard. If policy-holders have non-negative prudence, then background risk does not decrease effort and, when effort increases, expands the set of feasible policies. However, the effect of background risk on equilibrium is indeterminate. We analyse the choice between stock and mutual insurance; mutual insurance is equivalent to a fair policy plus background risk. Our results imply that competitive insurance markets with moral hazard should be dominated by stock insurers. Copyright (c) The London School of Economics and Political Science 2007.
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Bibliographic InfoArticle provided by London School of Economics and Political Science in its journal Economica.
Volume (Year): 75 (2008)
Issue (Month): 300 (November)
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- Francesca Barigozzi & Renaud Bourlès & Dominique Henriet & Giuseppe Pignataro, 2011.
"Risk-sharing with self-insurance: the role of cooperation,"
- F. Barigozzi & R. Bourles & D. Henriet & G. Pignataro, 2011. "Improving Compliance With Preventive Care: Cooperation in Mutual Health Insurance," Working Papers wp765, Dipartimento Scienze Economiche, Universita' di Bologna.
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