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Hidden Insurance in a Moral Hazard Economy

Author

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  • Bertola, Giuseppe
  • Koeniger, Winfried
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 non-exclusive financial contracts.

Suggested Citation

  • Bertola, Giuseppe & Koeniger, Winfried, 2014. "Hidden Insurance in a Moral Hazard Economy," CEPR Discussion Papers 9864, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:9864
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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

    Constrained efficiency; First-order approach; Hidden action; Principal agent;
    All these keywords.

    JEL classification:

    • 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
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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