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Limited Liability, Moral Hazard and Risk Taking - A Safety Net Game Experiment

Author

Listed:
  • Tibor Neugebauer

    () (Luxembourg School of Finance, University of Luxembourg)

  • Sascha Füllbrunn

    () (Luxembourg School of Finance, University of Luxembourg)

Abstract

Safety nets may reduce incentives to mitigate risks, and adversely affect people’s behavior. We model the safety net problem as a social dilemma game involving moral hazard, risk taking and limited liability. Individuals take costly measures to avoid a likely loss which, if incurred, is collectively indemnified. The situation is compared to a situation with full liability and the deterministic benchmark, i.e. the public goods game. We report experimental results. The data show that limited " liability leads to higher risk taking in comparison to full liability; however, the" difference is much smaller than predicted by theory. In comparison to the deterministic benchmark, individuals take higher loss avoidance levels. We attribute this effect to social responsibility since subjects behave as if they were liable for the losses they impose on the group. With repetition, the experimental data indicate a gradual emergence of the moral hazard problem in safety nets.

Suggested Citation

  • Tibor Neugebauer & Sascha Füllbrunn, 2010. "Limited Liability, Moral Hazard and Risk Taking - A Safety Net Game Experiment," LSF Research Working Paper Series 10-04, Luxembourg School of Finance, University of Luxembourg.
  • Handle: RePEc:crf:wpaper:10-04
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    References listed on IDEAS

    as
    1. Di Mauro, Carmela, 2002. "Ex ante and ex post moral hazard in compensation for income losses: results from an experiment," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 31(3), pages 253-271.
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    More about this item

    Keywords

    Experiment; social safety net; moral hazard; linear public goods game; hidden action;

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • H4 - Public Economics - - Publicly Provided Goods
    • I1 - Health, Education, and Welfare - - Health
    • I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty

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