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Optimal Insurance Policy Indemnity Schedules

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  • Gur Huberman
  • David Mayers
  • Clifford W. Smith Jr.

Abstract

We focus on two commonly observed insurance policy provisions: upper limits on coverage and deductibles. We suggest that upper limits on coverage result from the effective limited liability obtained through the bankruptcy statutes. We show that absent moral hazard, if the administrative cost structure has fixed costs and scale economies, deductibles are not optimal. But the optimal contractual form leads to a moral hazard problem, which deductibles control.

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Bibliographic Info

Article provided by The RAND Corporation in its journal Bell Journal of Economics.

Volume (Year): 14 (1983)
Issue (Month): 2 (Autumn)
Pages: 415-426

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Handle: RePEc:rje:bellje:v:14:y:1983:i:autumn:p:415-426

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Cited by:
  1. Alma Cohen & Rajeev Dehejia, 2003. "The Effect of Automobile Insurance and Accident Liability Laws in Traffic Fatalities," NBER Working Papers 9602, National Bureau of Economic Research, Inc.
  2. Chi, Yichun & Weng, Chengguo, 2013. "Optimal reinsurance subject to Vajda condition," Insurance: Mathematics and Economics, Elsevier, vol. 53(1), pages 179-189.
  3. Carlier, G. & Dana, R.-A., 2005. "Rearrangement inequalities in non-convex insurance models," Journal of Mathematical Economics, Elsevier, vol. 41(4-5), pages 483-503, August.
  4. Kenneth A. Froot, 2001. "The Market for Catastrophe Risk: A Clinical Examination," NBER Working Papers 8110, National Bureau of Economic Research, Inc.
  5. Ralph A. Winter, 1991. "The Liability Insurance Market," Journal of Economic Perspectives, American Economic Association, vol. 5(3), pages 115-136, Summer.
  6. Heidelbach, Olaf, 2007. "Efficiency of selected risk management instruments: An empirical analysis of risk reduction in Kazakhstani crop production," Studies on the Agricultural and Food Sector in Central and Eastern Europe, Leib­niz Institute of Agricultural Development in Central and Eastern Europe (IAMO), volume 40, number 92323.
  7. Carlier, Guillaume & Dana, Rose-Anne, 2002. "Insurance Contracts with deductibles and upper limits," Economics Papers from University Paris Dauphine 123456789/6771, Paris Dauphine University.
  8. Dominique Demougin & Claude Fluet, 1999. "Costly Sanctions and the Maximum Penalty Principle," Cahiers de recherche CREFE / CREFE Working Papers 100, CREFE, Université du Québec à Montréal.
  9. Winter, Ralph A., 2006. "Liability insurance, joint tortfeasors and limited wealth," International Review of Law and Economics, Elsevier, vol. 26(1), pages 1-14, March.
  10. Carlier, G. & Dana, R.-A., 2007. "Are generalized call-spreads efficient?," Journal of Mathematical Economics, Elsevier, vol. 43(5), pages 581-596, June.

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