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Independent Safety Controls with Moral Hazard

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Listed:
  • Eberhard Feess
  • Martin Nell

Abstract

We analyze the role of liability, insurance, and side payments for independent safety controls with unobservable care levels. By independent safety controls we mean that the accident probability depends on the care levels of two parties, and that the effects of the controls on the accident probability are stochastically inde-pendent. We show that efficiency can be reached for these kinds of double moral hazard through side payments if one agent detects that the other agent's security control has failed. This requires either an appropriate liability rule, or an arbitrarily chosen liability rule combined with fair insurance coverage.

Suggested Citation

  • Eberhard Feess & Martin Nell, 2002. "Independent Safety Controls with Moral Hazard," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 158(3), pages 408-419, September.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200209)158:3_408:iscwmh_2.0.tx_2-4
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    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law

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