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The Basic Analytics of Moral Hazard

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  • Arnott, Richard J
  • Stiglitz, Joseph E

Abstract

The basic analytics of moral hazard are developed using the simples t possible model of the insurance market. Even when the underlying expe cted utility function and the function relating the accident probability to accident-prevention effort are extremely well behaved, the indifference curves and feasibility set (the set of insurance contracts that at least break even) are not-indifference curves need not be convex and feasibility sets never are; price-and income-consum ption lines may be discontinuous; and effort is not, in general, a monotonic or continuous function of the parameters of the insurance policies provided. Copyright 1988 by The editors of the Scandinavian Journal of Economics.

Suggested Citation

  • Arnott, Richard J & Stiglitz, Joseph E, 1988. " The Basic Analytics of Moral Hazard," Scandinavian Journal of Economics, Wiley Blackwell, vol. 90(3), pages 383-413.
  • Handle: RePEc:bla:scandj:v:90:y:1988:i:3:p:383-413
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    1. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    2. Richard Arnott & Joseph Stiglitz, 1991. "Equilibrium in Competitive Insurance Markets with Moral Hazard," NBER Working Papers 3588, National Bureau of Economic Research, Inc.
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