Contracting under ex post moral hazard and non-commitment
AbstractThis paper characterizes the optimal insurance contract in an environment where an informed agent can misrepresent the state of the world to a principal who cannot credibly commit to an auditing strategy. Because the principal cannot commit, the optimal strategy of the agent is not to tell the truth all the time. Assuming that there are T > 1 possible losses, and that the agent cannot fake an accident (he is constrained only to misreport the size of the loss when a loss occurs), the optimal contract is such that higher losses are over-compensated while lower losses are on average under-compensated. The amount by which higher losses are over-compensated decreases as the loss increases. The optimal contract may then be represented as a simple combination of a deductible, a lump-sum payment and a coinsurance provision. Copyright Springer-Verlag Berlin/Heidelberg 2003
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Bibliographic InfoArticle provided by Springer in its journal Review Economic Design.
Volume (Year): 8 (2003)
Issue (Month): 1 (August)
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Other versions of this item:
- M. Martin Boyer, 2001. "Contracting under Ex Post Moral Hazard and Non-Commitment," CIRANO Working Papers 2001s-30, CIRANO.
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G2 - Financial Economics - - Financial Institutions and Services
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
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