Moral Hazard, Monitoring Costs, and Optimal Government Intervention

Neil Bruce and Kar-yiu Wong

Journal of Risk and Uncertainty, 1996, vol. 12, issue 1, 77-90

Abstract: When insurance firms can monitor with non-prohibitive costs the consumption of risk-influencing goods by an insured, they have incentives to tax-subsidize the insured's consumption of the goods. If the government cannot monitor at a lower cost than private insurers, intervention is neither needed nor desirable. Where the government does have a monitoring-cost advantage, it cannot achieve a constrained optimum by commodity tax-subsidies alone. It must also augment the level of insurance and, in some cases, prohibit private tax-subsidies by insurers. Such "invasive" intervention can be avoided if the government regulates the consumption of the risk-influencing goods. Copyright 1996 by Kluwer Academic Publishers

Date: 1996
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