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Optimal Insurance Contracts When Establishing the Amount of Losses Is Costly

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  • Louis Kaplow

    ([1] Harvard Law School, 02138 Cambridge MA [2] the National Bureau of Economic Research)

Abstract

The problem of establishing the amount of losses covered by public and private insurance is often characterized by asymmetric information, in which the claimant already knows the extent of a loss but this can be demonstrated to the insurer only at a cost. It is shown that a simple arrangement, which provides greater coverage whenever individuals demonstrate high losses, gives claimants an excessive incentive to establish the amount of their losses. This paper determines what insurance claims process, consistent with the form typically employed in existing insurance arrangements, is optimal. The Geneva Papers on Risk and Insurance Theory (1994) 19, 139–152. doi:10.1007/BF01371689

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal The Geneva Papers on Risk and Insurance Theory.

Volume (Year): 19 (1994)
Issue (Month): 2 (December)
Pages: 139-152

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Handle: RePEc:pal:genrir:v:19:y:1994:i:2:p:139-152

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  1. Kathryn E. Spier, 1992. "Incomplete Contracts and Signalling," RAND Journal of Economics, The RAND Corporation, vol. 23(3), pages 432-443, Autumn.
  2. Reinganum, Jennifer F. & Wilde, Louis L., 1985. "Income tax compliance in a principal-agent framework," Journal of Public Economics, Elsevier, vol. 26(1), pages 1-18, February.
  3. Mookherjee, Dilip & Png, Ivan, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 399-415, May.
  4. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
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Cited by:
  1. Georges Dionne, 2012. "The Empirical Measure of Information Problems with Emphasis on Insurance Fraud and Dynamic Data," Cahiers de recherche 1233, CIRPEE.
  2. G. Dionne, 1998. "La mesure empirique des problèmes d'information," THEMA Working Papers 98-33, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  3. Rejesus, Roderick M., 2002. "Ex Post Moral Hazard In Crop Insurance: Costly State Verification Or Falsification?," 2002 Annual meeting, July 28-31, Long Beach, CA 19650, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  4. Hau, Arthur, 2008. "Optimal insurance under costly falsification and costly, inexact verification," Journal of Economic Dynamics and Control, Elsevier, vol. 32(5), pages 1680-1700, May.

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