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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. Dionne, G. & Viala, P., 1992. "Optimal Design of Financial Contracts and Moral Hazard," Cahiers de recherche 9219, Universite de Montreal, Departement de sciences economiques.
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  12. Bond, Eric W. & Crocker, Keith J., 1997. "Hardball and the soft touch: The economics of optimal insurance contracts with costly state verification and endogenous monitoring costs," Journal of Public Economics, Elsevier, vol. 63(2), pages 239-264, January.
  13. 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.
  14. 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.
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  17. 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.
  18. Boyer, M Martin, 2000. " Insurance Taxation and Insurance Fraud," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 2(1), pages 101-34.
  19. 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.
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