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Moral Hazard, Insurance, and Some Collusion

Author

Listed:
  • Ingela Alger

    () (Boston College)

  • Ching-to Albert Ma

    () (Boston University)

Abstract

A risk-averse consumer purchases an insurance policy; if she suffers a loss, she may receive services from a provider to recover some of the loss. Only the consumer and the provider know if the loss has actually occurred. The provider's behavior is uncertain. With some positive probability, the provider is honest, reporting the loss information truthfully to the insurer; with the complementary probability, the provider reports the information strategically, by writing a side-contract with the consumer to maximize the joint surplus of the provider-consumer coalition. We show that there is a loss of generality in considering only collusion-proof contracts, and characterize equilibria implemented by collusion-proof and noncollusion-proof contracts. When the probability of a provider acting collusively is small, the equilibrium contract is not collusion-proof but approximately first-best. When the probability of a provider acting collusively is large, the equilibrium contract is independent of this probability and identical to the equilibrium collusion-proof contract when the provider is collusive with probability 1.

Suggested Citation

  • Ingela Alger & Ching-to Albert Ma, 2001. "Moral Hazard, Insurance, and Some Collusion," Boston College Working Papers in Economics 496, Boston College Department of Economics.
  • Handle: RePEc:boc:bocoec:496
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    References listed on IDEAS

    as
    1. Laffont, Jean-Jacques & Rochet, Jean-Charles, 1997. " Collusion in Organizations," Scandinavian Journal of Economics, Wiley Blackwell, vol. 99(4), pages 485-495, December.
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    More about this item

    Keywords

    insurance; moral hazard; optimal contracts; honesty and dishonesty;

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I12 - Health, Education, and Welfare - - Health - - - Health Behavior

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