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Contracting under Ex Post Moral Hazard and Non-Commitment

  • M. Martin Boyer

This paper characterizes the optimal insurance contract in an environment where an informed agent can misrepresent the state of the world to a principal who cannot credibly commit to an auditing strategy. Because the principal cannot commit, the optimal strategy of the agent is not to tell the truth all the time. Assuming that there are T > 1 possible losses, and that the agent cannot fake an accident (he is constrained only to misreport the size of the loss when a loss occurs), the optimal contract is such that higher losses are over-compensated while lower losses are on average under-compensated. The amount by which higher losses are over-compensated decreases as the loss increases. The optimal contract may then be represented as a simple combination of a deductible, a lump-sum payment and a coinsurance provision. Ce document de travail caractérise le contrat optimal dans une économie où un agent informé de l'état de la nature doit rapporter cet état à un principal qui ne peut se commettre de manière crédible dans une stratégie de vérification de l'annonce de l'agent. Puisque le principal ne peut se commettre, il devient optimal pour l'agent de mentir avec une certaine probabilité. En supposant qu'il existe T>1 pertes possibles en cas d'accident, que l'agent ne peut feindre un accident (il est restreint à rapporter la perte en cas d'accident,0501s la présence d'un accident est une information de nature commune), le contrat optimal est tel que les hautes pertes sont sur-indemnisées alors que les faibles pertes sont sous-indemnisées en moyenne. Le niveau de sur-indemnisation des hautes pertes diminue toutefois avec la perte elle-même. Le contrat optimal peut ainsi être représenté comme une simple combinaison d'une franchise, d'un paiement forfaitaire et de co-paiements.

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Paper provided by CIRANO in its series CIRANO Working Papers with number 2001s-30.

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Length: 43 pages
Date of creation: 01 Apr 2001
Date of revision:
Handle: RePEc:cir:cirwor:2001s-30
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  1. Bond, E.W. & Crocker, K.J., 1993. "Hardball and the Soft Touch: The Economics of Optimal Insurance Contracts with Costly State Verification and Endogenous Monitoring Costs," Papers 10-93-1b, Pennsylvania State - Department of Economics.
  2. Bond, Eric W & Crocker, Keith J, 1991. "Smoking, Skydiving, and Knitting: The Endogenous Categorization of Risks in Insurance Markets with Asymmetric Information," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 177-200, February.
  3. Sanchez, Isabel & Sobel, Joel, 1993. "Hierarchical design and enforcement of income tax policies," Journal of Public Economics, Elsevier, vol. 50(3), pages 345-369, March.
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  7. Keith J. Crocker & John Morgan, 1998. "Is Honesty the Best Policy? Curtailing Insurance Fraud through Optimal Incentive Contracts," Journal of Political Economy, University of Chicago Press, vol. 106(2), pages 355-375, April.
  8. G. Dionne & R. Gagné, 1997. "The non-optimality of deductible contracts against fraudulent claims : an empirical evidence in automobile insurance," THEMA Working Papers 97-23, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  9. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
  10. Picard, Pierre, 1996. "Auditing claims in the insurance market with fraud: The credibility issue," Journal of Public Economics, Elsevier, vol. 63(1), pages 27-56, December.
  11. Dionne, G. & Viala, P., 1992. "Optimal Design of Financial Contracts and Moral Hazard," Cahiers de recherche 9219, Universite de Montreal, Departement de sciences economiques.
  12. Mookherjee, Dilip & Png, Ivan, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 399-415, May.
  13. Kurz, Mordecai, 1974. "Experimental approach to the determination of the demand for public goods," Journal of Public Economics, Elsevier, vol. 3(4), pages 329-348, November.
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  16. Lacker, Jeffrey M & Weinberg, John A, 1989. "Optimal Contracts under Costly State Falsification," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1345-63, December.
  17. Harrison, Glenn W, 1989. "Theory and Misbehavior of First-Price Auctions," American Economic Review, American Economic Association, vol. 79(4), pages 749-62, September.
  18. Khalil, Fahad & Parigi, Bruno M, 1998. "Loan Size as a Commitment Device," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(1), pages 135-50, February.
  19. Chang, Chun, 1990. "The dynamic structure of optimal debt contracts," Journal of Economic Theory, Elsevier, vol. 52(1), pages 68-86, October.
  20. J. David Cummins & Sharon Tennyson, 1993. "The Tort System "Lottery" and Insurance Fraud," Center for Financial Institutions Working Papers 94-05, Wharton School Center for Financial Institutions, University of Pennsylvania.
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