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The Effectiveness of State Legislation in Mitigating Moral Hazard: Evidence from Automobile Insurance

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Author Info

  • Hoyt, Robert E
  • Mustard, David B
  • Powell, Lawrence S

Abstract

Insurance fraud, which adds an estimated $85 billion per year to the total insurance bill in the United States, is an extremely serious problem for consumers, regulators, and insurance companies. This paper analyzes the effects of state legislation and market conditions on automobile insurance fraud from 1988 to 1999, a period exhibiting a substantial increase in the enactment of antifraud legislation. Our empirical results show that the laws have mixed effects: two laws have no statistically significant effect on fraud. The strongest evidence of fraud mitigation effects is associated with mandatory special investigation units, classification of insurance fraud as a felony, and mandatory reporting of professionals to licensing authorities. However, laws requiring insurers to report potentially fraudulent claims to law enforcement authorities actually increase fraud, which may reflect some substitution from more efficacious private efforts to less productive state activity. Many underlying characteristics of the market also affect fraud.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Law and Economics.

Volume (Year): 49 (2006)
Issue (Month): 2 (October)
Pages: 427-50

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Handle: RePEc:ucp:jlawec:y:2006:v:49:i:2:p:427-50

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Web page: http://www.journals.uchicago.edu/JLE/

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Cited by:
  1. Miguel Santolino & Jean-Philippe Boucher, 2009. "Modelling the disability severity score in motor insurance claims: an application to the Spanish case," IREA Working Papers 200902, University of Barcelona, Research Institute of Applied Economics, revised Jan 2009.

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