Provider Insurance

Michael Manove ()

Bell Journal of Economics, 1983, vol. 14, issue 2, pages 489-496

Abstract: Provider insurance is insurance offered by the provider of a product or service against losses or damages incurred in connection with the use of that product or service. It is demonstrated that a rate-setting agency, with no information about consumers, can design a provider-insurance mechanism that induces both the provider and the consumer to reduce losses efficiently, and, at the same time, transfers risk from the (risk-averse) consumer to the (risk-neutral) provider without moral hazard. The structure of the optimal provider-insurance mechanism is derived. The optimal mechanism must be imposed on a noncompetitive industry by regulators, but it can arise spontaneously in competitive industries and can be sustained.

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