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Tax sharing in insurance market: A useful parametrization

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Abstract

In this paper, we use a Principal-Agent model (à la Holmström) to evaluate the economic impacts at imposing a tax on insurance payment resulting from an optimal contract in presence of moral hazard. We show that, in most cases, the tax generates a disincentive for the risk averse insured to provide sufficient effort at maintaining care, hence increasing insurance payments. As a result, company's profit and overall welfare decrease. Simulations show that this last result can be reversed only in cases where the cost of effort is low and the perceived insurance quality is very high.

Suggested Citation

  • Christelle Viauroux, 2011. "Tax sharing in insurance market: A useful parametrization," UMBC Economics Department Working Papers 11-132, UMBC Department of Economics.
    • Handle: RePEc:umb:econwp:11132
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    File URL: http://www.umbc.edu/economics/wpapers/wp_11_132.pdf
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    Cited by:

    1. Dionne, Georges & Harrington, Scott, 2017. "Insurance and Insurance Markets," Working Papers 17-2, HEC Montreal, Canada Research Chair in Risk Management.

    More about this item

    Keywords

    moral hazard; taxes; principal-agent model; insurance;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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