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Moral Hazard in a Mutual Health-Insurance System: German Knappschaften, 1867-1914

  • Guinnane, Timothy

    (Yale University)

  • Streb, Jochen

    (University of Hohenheim)

This paper studies moral hazard in a sickness-insurance fund that provided the model for social-insurance schemes around the world. The German Knappschaften were formed in the medieval period to provide sickness, accident, and death benefits for miners. By the mid-nineteenth century, participation in the Knappschaft was compulsory for workers in mines and related occupations, and the range and generosity of benefits had expanded considerably. Each Knappschaft was locally controlled and self-funded, and their admirers saw in them the ability to use local knowledge and good incentives to deliver benefits at low costs. The Knappschaft underlies Bismarck's sickness and accident insurance legislation (1883 and 1884), which in turn forms the basis of the German social-insurance system today and, indirectly, many social-insurance systems around the world. This paper focuses on a problem central to any insurance system, and one that plagued the Knappschaften as they grew larger in the later nineteenth century: the problem of moral hazard. Replacement pay for sick miners made it attractive, on the margin, for miners to invent or exaggerate conditions that made it impossible for them to work. Here we outline the moral hazard problem the Knappschaften faced as well as the internal mechanisms they devised to control it. We then use econometric models to demonstrate that those mechanisms were at best imperfect.

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Paper provided by Yale University, Department of Economics in its series Working Papers with number 70.

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Date of creation: Sep 2009
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Handle: RePEc:ecl:yaleco:70
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  1. Murray, John E. & Nilsson, Lars, 2007. "Accident risk compensation in late imperial Austria: Wage differentials and social insurance," Explorations in Economic History, Elsevier, vol. 44(4), pages 568-587, October.
  2. Dhaval Dave & Robert Kaestner, 2006. "Health Insurance and Ex Ante Moral Hazard: Evidence from Medicare," NBER Working Papers 12764, National Bureau of Economic Research, Inc.
  3. Guinnane, Timothy W., 2001. "Cooperatives As Information Machines: German Rural Credit Cooperatives, 1883 1914," The Journal of Economic History, Cambridge University Press, vol. 61(02), pages 366-389, June.
  4. Gottlieb, Daniel, 2007. "Asymmetric information in late 19th century cooperative insurance societies," Explorations in Economic History, Elsevier, vol. 44(2), pages 270-292, April.
  5. Emery, J. C. Herbert, 1996. "Risky Business? Nonactuarial Pricing Practices and the Financial Viability of Fraternal Sickness Insurers," Explorations in Economic History, Elsevier, vol. 33(2), pages 195-226, April.
  6. Timothy Besley & Anne Case, 1994. "Unnatural Experiments? Estimating the Incidence of Endogenous Policies," NBER Working Papers 4956, National Bureau of Economic Research, Inc.
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