Optimal insurance under moral hazard in loss reduction

Hangsuck Lee, Minha Lee and Jimin Hong

The North American Journal of Economics and Finance, 2022, vol. 60, issue C

Abstract: This study investigates the optimal insurance when moral hazard exists in loss reduction. We identify that the optimal insurance is full insurance up to a limit and partial insurance above that limit. In case of partial insurance, the indemnity schedule for prudent individual is convex, linear, or concave in loss, depending on the shapes of the utility and loss distribution. The optimal insurance may include a deductible for large losses only when the indemnity schedule is convex. It may also include a fixed reimbursement when the schedule is convex or concave. When the loss distribution belongs to the one dimensional exponential family with canonical form, the indemnity schedule is concave under IARA and CARA, whereas it can be concave or convex under DARA.

Keywords: Optimal insurance; Deductible; Fixed-reimbursement; One dimensional exponential family with canonical form; Moral hazard (search for similar items in EconPapers)
JEL-codes: D81 D82 G52 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:60:y:2022:i:c:s1062940821002205

DOI: 10.1016/j.najef.2021.101627

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