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Moral Hazard in a Mutual Health-Insurance System: German Knappschaften, 1867–1914

  • Timothy W. Guinnane
  • Jochen Streb

    ()

The Knappschaft underlies Bismarck’s sickness and accident insurance legislation (1883 and 1884), which in turn forms the basis of the German social-insurance system today and, indirectly, many social-insurance systems around the world. The Knappschaften were formed in the medieval period to provide sickness, accident, and death benefi ts for miners. By the mid-nineteenth century, participation in the Knappschaft was compulsory for workers in mines and related occupations, and the range and generosity of benefi ts had expanded considerably. Each Knappschaft was locally controlled and self-funded, and their admirers saw in them the ability to use local knowledge and good incentives to deliver benefi ts at low cost. This paper focuses on a problem central to any insurance system, and one that plagued the Knappschaften as they grew larger in the later nineteenth century: the problem of moral hazard. Replacement pay for sick miners made it attractive, on the margin, for miners to invent or exaggerate conditions that made it impossible for them to work. Here we outline the moral hazard problem the Knappschaften faced as well as the internal mechanisms they devised to control it. We then use econometric models to demonstrate that those mechanisms were at best imperfect.

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Paper provided by Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen in its series Ruhr Economic Papers with number 0163.

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Length: 45 pages
Date of creation: Jan 2010
Date of revision:
Handle: RePEc:rwi:repape:0163
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  1. Timothy W. Guinnane, 1997. "Cooperatives as Information Machines: German Rural Credit Cooperatives, 1883-1914," Discussion Papers 97-20, University of Copenhagen. Department of Economics.
  2. Timothy Besley & Anne Case, 1994. "Unnatural Experiments? Estimating the Incidence of Endogenous Policies," NBER Working Papers 4956, National Bureau of Economic Research, Inc.
  3. Emery, J. C. Herbert, 1996. "Risky Business? Nonactuarial Pricing Practices and the Financial Viability of Fraternal Sickness Insurers," Explorations in Economic History, Elsevier, vol. 33(2), pages 195-226, April.
  4. Dhaval Dave & Robert Kaestner, 2009. "Health insurance and ex ante moral hazard: evidence from Medicare," International Journal of Health Care Finance and Economics, Springer, vol. 9(4), pages 367-390, December.
  5. Gottlieb, Daniel, 2007. "Asymmetric information in late 19th century cooperative insurance societies," Explorations in Economic History, Elsevier, vol. 44(2), pages 270-292, April.
  6. Murray, John E. & Nilsson, Lars, 2007. "Accident risk compensation in late imperial Austria: Wage differentials and social insurance," Explorations in Economic History, Elsevier, vol. 44(4), pages 568-587, October.
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