IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

The Basic Analytics of Moral Hazard

Listed author(s):
  • Richard J. Arnott
  • Joseph E. Stiglitz

This paper develops the basic analytics of moral hazard, for the two-outcome case where either a fixed damage accident occurs or it does not. The analysis focuses on the relationship between the insurance premium paid and the insurance benefits received in the event of an accident, and is conducted in benefit-premium space. The central message of the paper is that even when the underlying functions, the expected utility function and the function relating the accident probability to accident-prevention effort, are extremely well-behaved, the indifference curves and feasibility set (the set of insurance contracts which at least break even) are not-indifference curves need not be convex and feasibility sets never are; price-and income- consumption lines may be discontinuous; and effort is not in general a monotonic or continuous function of the parameters of the insurance policies provided. Part I of this paper establishes these results, while Part II discusses sane of their implications. The bad behavior of indifference curves and the feasibility set profoundly affects the nature and existence of a competitive equilibrium. We illustrate this, though we do not provide a thorough analysis. We also show that our canonical model of an insurance market with moral hazard can be reinterpreted to provide a model of loans with bankruptcy, or of work incentives.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2484.

in new window

Date of creation: Jan 1988
Publication status: published as Scandinavian Journal of Economics, Vol.90, No. 3, pp. 383-413, (1988).
Handle: RePEc:nbr:nberwo:2484
Note: PE
Contact details of provider: Postal:
National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.

Phone: 617-868-3900
Web page:

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

in new window

  1. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  2. Richard Arnott & Joseph Stiglitz, 1991. "Equilibrium in Competitive Insurance Markets with Moral Hazard," NBER Working Papers 3588, National Bureau of Economic Research, Inc.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:2484. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.