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Optimal Insurance Under Random Auditing

  • Marie-Cécile Fagart

    (Crest)

  • Pierre Picard

    (Crest)

We provide a characterization of an optimal insurance contract (coverage schedule and audit policy) when the monitoring procedure is random. When the policyholder exhibits constant absolute risk aversion, the optimal contract involves a positive indemnity payment with a deductible when the magnitude of damages exceeds a threshold.

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Paper provided by Centre de Recherche en Economie et Statistique in its series Working Papers with number 98-47.

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Date of creation: 1998
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Handle: RePEc:crs:wpaper:98-47
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  1. Robert M. Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
  2. Marie-Cécile Fagart & Pierre Picard, 1998. "Optimal Insurance Under Random Auditing," Working Papers 98-47, Centre de Recherche en Economie et Statistique.
  3. 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.
  4. David P. Baron & David Besanko, 1984. "Regulation, Asymmetric Information, and Auditing," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 447-470, Winter.
  5. Picard, Pierre, 1996. "On the design of optimal insurance policies under manipulation of audit cost," CEPREMAP Working Papers (Couverture Orange) 9605, CEPREMAP.
  6. Kim C. Border & Joel Sobel, 1987. "Samurai Accountant: A Theory of Auditing and Plunder," Review of Economic Studies, Oxford University Press, vol. 54(4), pages 525-540.
  7. Guesnerie, Roger & Laffont, Jean-Jacques, 1984. "A complete solution to a class of principal-agent problems with an application to the control of a self-managed firm," Journal of Public Economics, Elsevier, vol. 25(3), pages 329-369, December.
  8. Dilip Mookherjee & Ivan Png, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 399-415.
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