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Dynamic Prevention in Short Term Insurance Contracts

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  • M. Martin Boyer
  • Karine Gobert

Abstract

This paper looks at the dynamic properties of insurance contracts when insurers have better technology at preventing catastrophic losses than the insured. The prevention technology is owned by the insurers and is permanent. If long-term contracts are not possible, the insured is faced with a commitment problem since he may want to renegotiate the contract or change insurer after his initial insurer has invested in prevention. Because of this hold-up problem, we find that the investment in prevention is delayed. Le but de cet article est d'étudier les propriétés dynamiques des contrats d'assurance lorsque les assureurs détiennent une meilleure technologie de prévention des catastrophes que les assurés. Cette technologie est permanente au sens où elle ne se déprécie pas. Si les contrats de long terme ne sont pas possibles, les assurés font face à un problème d'engagement puisqu'ils voudraient renégocier le contrat ou changer d'assureur après que l'assureur initial a investi le montant optimal en prévention. À cause de ce problème de hold-up, nous montrons que l'investissement en prévention est retardé, et ce même si l'assuré demeure avec le même assureur sur tout l'horizon de fonctionnement. Nous montrons également que la dynamique des primes d'assurance diffère d'une suite de primes actuarielles.

Suggested Citation

  • M. Martin Boyer & Karine Gobert, 2001. "Dynamic Prevention in Short Term Insurance Contracts," CIRANO Working Papers 2001s-69, CIRANO.
  • Handle: RePEc:cir:cirwor:2001s-69
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    File URL: http://www.cirano.qc.ca/files/publications/2001s-69.pdf
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    References listed on IDEAS

    as
    1. Joskow, Paul L, 1985. "Vertical Integration and Long-term Contracts: The Case of Coal-burning Electric Generating Plants," Journal of Law, Economics, and Organization, Oxford University Press, vol. 1(1), pages 33-80, Spring.
    2. Joskow, Paul L, 1988. "Asset Specificity and the Structure of Vertical Relationships: Empirical Evidence," Journal of Law, Economics, and Organization, Oxford University Press, vol. 4(1), pages 95-117, Spring.
    3. Chiappori, Pierre-Andre & Macho, Ines & Rey, Patrick & Salanie, Bernard, 1994. "Repeated moral hazard: The role of memory, commitment, and the access to credit markets," European Economic Review, Elsevier, vol. 38(8), pages 1527-1553, October.
    4. Bruno Jullien & Georges Dionne & Bernard Caillaud, 2000. "Corporate insurance with optimal financial contracting," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 16(1), pages 77-105.
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    More about this item

    Keywords

    Insurance; Prevention; Commitment; Contract Theory; Moral Hazard; Assurance; Prévention; Engagement; Théorie des contrats; Aléa Moral;

    JEL classification:

    • G - Financial Economics

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