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Hidden insurance in a moral‐hazard economy
Author(s) -
Bertola Giuseppe,
Koeniger Winfried
Publication year - 2015
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/1756-2171.12110
Subject(s) - inefficiency , moral hazard , economics , exploit , order (exchange) , payment , general equilibrium theory , insurance policy , welfare , production (economics) , competitive equilibrium , actuarial science , auto insurance risk selection , key person insurance , microeconomics , incentive , finance , market economy , computer security , computer science
We analyze the general equilibrium of an economy in which a competitive industry produces nonexclusive insurance services. The equilibrium is inefficient because insurance contracts cannot control moral hazard, and welfare can be improved by policies that reduce insurance by increasing its price above marginal cost. We discuss how insurance production costs that exceed expected claim payments interact with moral hazard in determining the equilibrium's inefficiency, and show that these costs can make insurance premia so actuarially unfair as to validate the standard first‐order conditions we exploit in our analysis.