Independent Safety Controls with Moral Hazard
We analyze the role of liability, insurance, and side payments for independent safety controls with unobservable care levels. By independent safety controls we mean that the accident probability depends on the care levels of two parties, and that the effects of the controls on the accident probability are stochastically inde-pendent. We show that efficiency can be reached for these kinds of double moral hazard through side payments if one agent detects that the other agent's security control has failed. This requires either an appropriate liability rule, or an arbitrarily chosen liability rule combined with fair insurance coverage.
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Volume (Year): 158 (2002)
Issue (Month): 3 (September)
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