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Optimal Insurance Policy Indemnity Schedules

Author

Listed:
  • 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.

Suggested Citation

  • Gur Huberman & David Mayers & Clifford W. Smith Jr., 1983. "Optimal Insurance Policy Indemnity Schedules," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 415-426, Autumn.
    • Handle: RePEc:rje:bellje:v:14:y:1983:i:autumn:p:415-426
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