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A Theory of Mutual Formation and Moral Hazard with Evidence from the History of the Insurance Industry

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  • Smith, Bruce D
  • Stutzer, Michael

Abstract

Nonprofit, mutually owned insurance and banking organizations have significant market shares in the insurance and banking industries. A first step in a systematic study of these financial mutual is to examine the reasons for their formation. Doing so provides empirical support for the view that these mutual arose as an efficient means of addressing contracting challenges caused by aggregate uncertainties and moral hazard. A formal model with this property is presented. We argue that information asymmetries do more to explain the kinds of contracts offered by financial mutual than do agency problems between owners, managers, and customers. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Suggested Citation

  • Smith, Bruce D & Stutzer, Michael, 1995. "A Theory of Mutual Formation and Moral Hazard with Evidence from the History of the Insurance Industry," Review of Financial Studies, Society for Financial Studies, vol. 8(2), pages 545-577.
  • Handle: RePEc:oup:rfinst:v:8:y:1995:i:2:p:545-77
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    Cited by:

    1. Pierre Picard, 2014. "Participating Insurance Contracts and the Rothschild-Stiglitz Equilibrium Puzzle," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 39(2), pages 153-175, September.
    2. Francesca Barigozzi & Renaud Bourlès & Dominique Henriet & Giuseppe Pignataro, 2017. "Pool size and the sustainability of optimal risk-sharing agreements," Theory and Decision, Springer, pages 273-303.
    3. Seog S. Hun, 2006. "Limited Competition, Information Asymmetry, and Organizational Forms," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 1(2), pages 1-14, February.
    4. Byeongyong Paul Choi & Elyas Elyasiani, 2011. "Foreign-owned insurer performance in the US property-liability markets," Applied Economics, Taylor & Francis Journals, vol. 43(3), pages 291-306.
    5. Louis Lévy-Garboua & Claude Montmarquette & Jonathan Vaksmann & Marie Claire Villeval, 2017. "Voluntary Contributions to a Mutual Insurance Pool," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 19(1), pages 198-218, February.
    6. John E. Murray, 2011. "Asymmetric Information and Countermeasures in Early Twentieth‐Century American Short‐Term Disability Microinsurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 78(1), pages 117-138, March.
    7. Kane, Edward J. & Hendershott, Robert, 1996. "The federal deposit insurance fund that didn't put a bite on U.S. taxpayers," Journal of Banking & Finance, Elsevier, vol. 20(8), pages 1305-1327, September.
    8. Laux, Christian & Muermann, Alexander, 2006. "Mutual versus stock insurers: Fair premium, capital, and solvency," CFS Working Paper Series 2006/26, Center for Financial Studies (CFS).
    9. Francesca Barigozzi & Renaud Bourlès & Dominique Henriet & Giuseppe Pignataro, 2017. "Pool size and the sustainability of optimal risk-sharing agreements," Theory and Decision, Springer, pages 273-303.
    10. Magnus Lindmark & Lars-Fredrik Andersson & Mike Adams, 2006. "The Evolution and Development of the Swedish Insurance Market," Accounting History Review, Taylor & Francis Journals, pages 341-370.
    11. Braun, Alexander & Schmeiser, Hato & Rymaszewski, Przemysław, 2015. "Stock vs. mutual insurers: Who should and who does charge more?," European Journal of Operational Research, Elsevier, vol. 242(3), pages 875-889.
    12. Hakenes, Hendrik & Schnabel, Isabel, 2006. "The Threat of Capital Drain: A Rationale for Public Banks?," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 107, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    13. repec:spr:amsrev:v:6:y:2016:i:3:d:10.1007_s13162-016-0083-2 is not listed on IDEAS
    14. Nekby, Lena, 2001. "Pure vs. Mutual Sick Insurance Societies. Evidence from Swedish Historical Data," Research Papers in Economics 2001:10, Stockholm University, Department of Economics.
    15. Fabrice Roth, 2012. "Crise et régulation des marchés financiers : Quel impact sur les formes mutuelles dans l'assurance ?," Working Papers halshs-00692342, HAL.
    16. Luigi Buzzacchi & Gilberto Turati, 2009. "Collective Risks in Local Administrations: Can a Private Insurer Be Better than a Public Mutual Fund?," Working papers 03, Former Department of Economics and Public Finance "G. Prato", University of Torino.
    17. Laux, Christian & Muermann, Alexander, 2010. "Financing risk transfer under governance problems: Mutual versus stock insurers," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 333-354, July.
    18. Fabrice Roth, 1998. "Structures de propriété, pouvoir discrétionnaire managérial et choix d'activité dans l'assurance dommages en France," Revue Finance Contrôle Stratégie, revues.org, vol. 1(1), pages 169-194, March.

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