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The Effectiveness of State Legislation in Mitigating Moral Hazard: Evidence from Automobile Insurance

  • Hoyt, Robert E
  • Mustard, David B
  • Powell, Lawrence S

Insurance fraud, which adds an estimated $85 billion per year to the total insurance bill in the United States, is an extremely serious problem for consumers, regulators, and insurance companies. This paper analyzes the effects of state legislation and market conditions on automobile insurance fraud from 1988 to 1999, a period exhibiting a substantial increase in the enactment of antifraud legislation. Our empirical results show that the laws have mixed effects: two laws have no statistically significant effect on fraud. The strongest evidence of fraud mitigation effects is associated with mandatory special investigation units, classification of insurance fraud as a felony, and mandatory reporting of professionals to licensing authorities. However, laws requiring insurers to report potentially fraudulent claims to law enforcement authorities actually increase fraud, which may reflect some substitution from more efficacious private efforts to less productive state activity. Many underlying characteristics of the market also affect fraud.

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Article provided by University of Chicago Press in its journal Journal of Law and Economics.

Volume (Year): 49 (2006)
Issue (Month): 2 (October)
Pages: 427-50

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Handle: RePEc:ucp:jlawec:y:2006:v:49:i:2:p:427-50
Contact details of provider: Web page: http://www.journals.uchicago.edu/JLE/

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