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Optimal Insurance Contracts When Establishing the Amount of Losses Is Costly

  • Louis Kaplow

    ([1] Harvard Law School, 02138 Cambridge MA [2] the National Bureau of Economic Research)

The problem of establishing the amount of losses covered by public and private insurance is often characterized by asymmetric information, in which the claimant already knows the extent of a loss but this can be demonstrated to the insurer only at a cost. It is shown that a simple arrangement, which provides greater coverage whenever individuals demonstrate high losses, gives claimants an excessive incentive to establish the amount of their losses. This paper determines what insurance claims process, consistent with the form typically employed in existing insurance arrangements, is optimal. The Geneva Papers on Risk and Insurance Theory (1994) 19, 139–152. doi:10.1007/BF01371689

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Article provided by Palgrave Macmillan & International Association for the Study of Insurance Economics (The Geneva Association) in its journal The Geneva Papers on Risk and Insurance Theory.

Volume (Year): 19 (1994)
Issue (Month): 2 (December)
Pages: 139-152

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Handle: RePEc:pal:genrir:v:19:y:1994:i:2:p:139-152
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  1. Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, vol. 47(1), pages 61-73, January.
  2. Robert M. Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
  3. Reinganum, Jennifer F. & Wilde, Louis L., 1985. "Income tax compliance in a principal-agent framework," Journal of Public Economics, Elsevier, vol. 26(1), pages 1-18, February.
  4. Dilip Mookherjee & Ivan Png, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 399-415.
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