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Hidden Insurance in a Moral Hazard Economy

Author

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  • Bertola, Giuseppe

    (EDHEC Business School)

  • Koeniger, Winfried

    (University of St. Gallen)

Abstract

We consider an economy where individuals privately choose effort and trade competitively priced securities that pay off with effort-determined probability. We show that if insurance against a negative shock is sufficiently incomplete, then standard functional form restrictions ensure that individual objective functions are optimized by an effort and insurance combination that is unique and satisfies first- and second-order conditions. Modeling insurance incompleteness in terms of costly production of private insurance services, we characterize the constrained inefficiency arising in general equilibrium from competitive pricing of nonexclusive financial contracts.

Suggested Citation

  • Bertola, Giuseppe & Koeniger, Winfried, 2013. "Hidden Insurance in a Moral Hazard Economy," IZA Discussion Papers 7806, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp7806
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    Cited by:

    1. Loss, Frédéric & Piaser, Gwenaël, 2019. "Linear price equilibria in a non-exclusive insurance market," Journal of Mathematical Economics, Elsevier, vol. 81(C), pages 22-30.
    2. Martin, Elliot PhD & Shaheen, Susan PhD & Stocker, Adam, 2021. "Impacts of Transportation Network Companies on Vehicle Miles Traveled, Greenhouse Gas Emissions, and Travel Behavior Analysis from the Washington D.C., Los Angeles, and San Francisco Markets," Institute of Transportation Studies, Research Reports, Working Papers, Proceedings qt90b6d7r3, Institute of Transportation Studies, UC Berkeley.
    3. Bertola, Giuseppe & Koeniger, Winfried, 2014. "On the validity of the first-order approach with moral hazard and hidden assets," Economics Letters, Elsevier, vol. 124(3), pages 402-405.

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    More about this item

    Keywords

    first-order approach; principal agent; hidden action; constrained efficiency;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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