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The Role of Memory in Long-Term Contracting with Moral Hazard: Empirical Evidence in Automobile Insurance

Author

Listed:
  • Dionne, G.
  • Maurice, M.
  • Pinquet, J.
  • Vanasse, C.

Abstract

This paper tests the efficiency associated with the role of memory in long-term contracting. Bonus-malus schemes in automobile insurance are examples of contracts that use memory. During the eighties different contributors (Lambert, 1983, Rogerson, 1985, Boyer, and Dionne, 1989) showed how multi-period contracting under moral hazard improves resource allocation. In particular, it was demonstrated that multi-period contracts with memory outperform those without memory under full commitment.

Suggested Citation

  • Dionne, G. & Maurice, M. & Pinquet, J. & Vanasse, C., 2001. "The Role of Memory in Long-Term Contracting with Moral Hazard: Empirical Evidence in Automobile Insurance," Ecole des Hautes Etudes Commerciales de Montreal- 01-05, Ecole des Hautes Etudes Commerciales de Montreal-Chaire de gestion des risques..
    • Handle: RePEc:fth:etcori:01-05
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    1. Fudenberg, Drew & Holmstrom, Bengt & Milgrom, Paul, 1990. "Short-term contracts and long-term agency relationships," Journal of Economic Theory, Elsevier, vol. 51(1), pages 1-31, June.
    2. James M. Malcomson & Frans Spinnewyn, 1988. "The Multiperiod Principal-Agent Problem," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 55(3), pages 391-407.
    3. Jewitt, Ian, 1988. "Justifying the First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 56(5), pages 1177-1190, September.
    4. 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.
    5. G. Dionne & C. Gouriéroux & C. Vanasse, 1998. "Evidence of adverse selection in automobile insurance markets," THEMA Working Papers 98-22, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    6. Crocker, Keith J & Snow, Arthur, 1986. "The Efficiency Effects of Categorical Discrimination in the Insurance Industry," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 321-344, April.
    7. Richard A. Lambert, 1983. "Long-Term Contracts and Moral Hazard," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 441-452, Autumn.
    8. Cameron, A Colin & Trivedi, Pravin K, 1986. "Econometric Models Based on Count Data: Comparisons and Applications of Some Estimators and Tests," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 1(1), pages 29-53, January.
    9. Georges Dionne & Christian Gourieroux & Charles Vanasse, 2001. "Testing for Evidence of Adverse Selection in the Automobile Insurance Market: A Comment," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 444-473, April.
    10. Pierre-Andre Chiappori & Bernard Salanie, 2000. "Testing for Asymmetric Information in Insurance Markets," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 56-78, February.
    11. G. Dionne & N. Doherty & N. Fombaron, 2000. "Adverse Selection in Insurance Markets," THEMA Working Papers 2000-21, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    12. Dionne, G & Vanasse, C, 1992. "Automobile Insurance Ratemaking in the Presence of Asymmetrical Information," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(2), pages 149-165, April-Jun.
    13. Boyer, Marcel & Dionne, Georges, 1989. "An Empirical Analysis of Moral Hazard and Experience Rating," The Review of Economics and Statistics, MIT Press, vol. 71(1), pages 128-134, February.
    14. Picard, Pierre, 1987. "On the design of incentive schemes under moral hazard and adverse selection," Journal of Public Economics, Elsevier, vol. 33(3), pages 305-331, August.
    15. Mark V. Pauly, 1974. "Overinsurance and Public Provision of Insurance: The Roles of Moral Hazard and Adverse Selection," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 88(1), pages 44-62.
    16. Gourieroux, Christian & Monfort, Alain & Trognon, Alain, 1984. "Pseudo Maximum Likelihood Methods: Applications to Poisson Models," Econometrica, Econometric Society, vol. 52(3), pages 701-720, May.
    17. Allen, Franklin, 1985. "Repeated principal-agent relationships with lending and borrowing," Economics Letters, Elsevier, vol. 17(1-2), pages 27-31.
    18. Steven Shavell, 1979. "On Moral Hazard and Insurance," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 93(4), pages 541-562.
    19. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, vol. 53(1), pages 69-76, January.
    20. J. Pinquet & M. Guillén & C. Bolancé, 2000. "Long-range contagion in automobile insurance data : estimation and implications for experience rating," THEMA Working Papers 2000-43, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    21. J. Pinquet, 1997. "Experience rating through heterogeneous models," THEMA Working Papers 97-25, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    22. Rubinstein, Ariel & Yaari, Menahem E., 1983. "Repeated insurance contracts and moral hazard," Journal of Economic Theory, Elsevier, vol. 30(1), pages 74-97, June.
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    Cited by:

    1. Pinquet, Jean, 1998. "Designing Optimal Bonus-Malus Systems from Different Types of Claims," ASTIN Bulletin, Cambridge University Press, vol. 28(2), pages 205-220, November.
    2. Dionne, G. & Doherty, N., 1991. "Adverse Selection In Insurance Markets: A Selective Survey," Cahiers de recherche 9105, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    3. Alma Cohen & Peter Siegelman, 2010. "Testing for Adverse Selection in Insurance Markets," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(1), pages 39-84, March.
    4. Desjardins, Denise & Dionne, Georges & Pinquet, Jean, 2001. "Experience Rating Schemes for Fleets of Vehicles," ASTIN Bulletin, Cambridge University Press, vol. 31(1), pages 81-105, May.
    5. G. Dionne, 2001. "Commitment and Automobile Insurance in France, Quebec and Japan," THEMA Working Papers 2001-10, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    6. Dionne, Georges & Michaud, Pierre-Carl & Pinquet, Jean, 2013. "A review of recent theoretical and empirical analyses of asymmetric information in road safety and automobile insurance," Research in Transportation Economics, Elsevier, vol. 43(1), pages 85-97.
    7. Georges Dionne & Olfa Ghali, 2005. "The (1992) Bonus‐Malus System in Tunisia: An Empirical Evaluation," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 72(4), pages 609-633, December.
    8. repec:ipf:psejou:v:42:y:2018:i:42:p:45-65 is not listed on IDEAS
    9. Olfa N. Ghali, 2001. "An Empirical Evaluation of the Implementation of the Bonus-Malus System in the Tunisian Automobile Insurance Ratemaking," Working Papers 0135, Economic Research Forum, revised 11 2001.
    10. Dionne, G., 2001. "Commitment and Automobile Insurance Regulation in France, Quebec and Japan," Ecole des Hautes Etudes Commerciales de Montreal- 01-04, Ecole des Hautes Etudes Commerciales de Montreal-Chaire de gestion des risques..
    11. Dionne, Georges, 2012. "The empirical measure of information problems with emphasis on insurance fraud and dynamic data," Working Papers 12-10, HEC Montreal, Canada Research Chair in Risk Management.
    12. Pavel A. Yakovlev & Christina M. Orr-Magulick, 2018. "On the road again: traffic fatalities and auto insurance minimums," Public Sector Economics, Institute of Public Finance, vol. 42(1), pages 45-65.
    13. Georges Dionne & Jean Pinquet & Mathieu Maurice & Charles Vanasse, 2011. "Incentive Mechanisms for Safe Driving: A Comparative Analysis with Dynamic Data," The Review of Economics and Statistics, MIT Press, vol. 93(1), pages 218-227, February.
    14. Magali Chaudey, 2017. "Why test the theory of incentives in a dynamic framework?," Working Papers 1733, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    15. Lilia Filipova, 2007. "Monitoring and Privacy in Automobile Insurance Markets with Moral Hazard," Discussion Paper Series 293, Universitaet Augsburg, Institute for Economics.
    16. Lilia Filipova, 2007. "Monitoring and Privacy in Automobile Insurance Markets with Moral Hazard," Working Papers 026, Bavarian Graduate Program in Economics (BGPE).
    17. He, Juan & Zheng, Xiaoyong & Rejesus, Roderick & Yorobe, Jose Jr, 2016. "Estimating the Effect of Crop Insurance on Input Use When Insured Farmers are Monitored," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 235225, Agricultural and Applied Economics Association.
    18. Jean Pinquet & Georges Dionne & Charles Vanasse & Mathieu Maurice, 2007. "Point-record incentives, asymmetric information and dynamic data," Working Papers hal-00243056, HAL.
    19. Yong-Woo Lee, 2013. "Testing for the Presence of Moral Hazard Using the Regulatory Reform in the Car Insurance Market: Case of Korea," The Japanese Economic Review, Japanese Economic Association, vol. 64(3), pages 414-429, September.

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    More about this item

    Keywords

    AUTOMOBILES ; INSURANCE ; INSURANCE COMPANIES;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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