Limited Liability, Moral Hazard and Risk Taking - A Safety Net Game Experiment
AbstractSafety nets may reduce incentives to mitigate risks, and adversely affect people’s behavior. We model the safety net problem as a social dilemma game involving moral hazard, risk taking and limited liability. Individuals take costly measures to avoid a likely loss which, if incurred, is collectively indemnified. The situation is compared to a situation with full liability and the deterministic benchmark, i.e. the public goods game. We report experimental results. The data show that limited liability leads to higher risk taking in comparison to full liability; however, the difference is much smaller than predicted by theory. In comparison to the deterministic benchmark, individuals take higher loss avoidance levels. We attribute this effect to social responsibility since subjects behave as if they were liable for the losses they impose on the group. With repetition, the experimental data indicate a gradual emergence of the moral hazard problem in safety nets.
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Bibliographic InfoPaper provided by Luxembourg School of Finance, University of Luxembourg in its series LSF Research Working Paper Series with number 10-04.
Date of creation: 2010
Date of revision:
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Experiment; social safety net; moral hazard; linear public goods game; hidden action;
Other versions of this item:
- Sascha Füllbrunn & Tibor Neugebauer, 2013. "Limited Liability, Moral Hazard, And Risk Taking: A Safety Net Game Experiment," Economic Inquiry, Western Economic Association International, vol. 51(2), pages 1389-1403, 04.
- C9 - Mathematical and Quantitative Methods - - Design of Experiments
- D7 - Microeconomics - - Analysis of Collective Decision-Making
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- H4 - Public Economics - - Publicly Provided Goods
- I1 - Health, Education, and Welfare - - Health
- I3 - Health, Education, and Welfare - - Welfare and Poverty
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-07-10 (All new papers)
- NEP-CBE-2010-07-10 (Cognitive & Behavioural Economics)
- NEP-CTA-2010-07-10 (Contract Theory & Applications)
- NEP-EXP-2010-07-10 (Experimental Economics)
- NEP-PBE-2010-07-10 (Public Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Di Mauro, Carmela, 2002. "Ex ante and ex post moral hazard in compensation for income losses: results from an experiment," The Journal of Socio-Economics, Elsevier, vol. 31(3), pages 253-271.
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