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Optimal Insurance Contracts When Establishing The Amount of Losses is Costly

  • Louis Kaplow

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.

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File URL: http://www.nber.org/papers/w4290.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4290.

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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
Handle: RePEc:nbr:nberwo:4290
Note: LE
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  1. Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, vol. 47(1), pages 61-73, January.
  2. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
  3. Mookherjee, Dilip & Png, Ivan, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 399-415, May.
  4. Reinganum, Jennifer F. & Wilde, Louis L., 1985. "Income tax compliance in a principal-agent framework," Journal of Public Economics, Elsevier, vol. 26(1), pages 1-18, February.
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