Optimal Insurance Contracts When Establishing The Amount of Losses is Costly
The problem of establishing the amount of losses covered by public and private insurance is often characterized by asymmetric information, in which the claimant already knows the extent of a loss but this can be demonstrated to the insurer only at a cost. It is shown that a simple arrangement, which provides greater coverage whenever individuals demonstrate unusually high losses, gives claimants an excessive incentive to establish the amount of their losses. This paper determines what insurance claims process, consistent with the form typically employed in existing insurance arrangements, is optimal.
|Date of creation:||Mar 1993|
|Date of revision:|
|Publication status:||published as The Geneva Papers on Risk and Insurance Theory, vol. 19, no. 2, pp. 139-152, December 1994|
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- Robert Townsend, 1979.
"Optimal contracts and competitive markets with costly state verification,"
45, Federal Reserve Bank of Minneapolis.
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