A Theory of Mutual Formation and Moral Hazard with Evidence from the History of the Insurance Industry

Bruce Smith and Michael Stutzer

The Review of Financial Studies, 1995, vol. 8, issue 2, 545-77

Abstract: Nonprofit, mutually owned insurance and banking organizations have significant market shares in the insurance and banking industries. A first step in a systematic study of these financial mutual is to examine the reasons for their formation. Doing so provides empirical support for the view that these mutual arose as an efficient means of addressing contracting challenges caused by aggregate uncertainties and moral hazard. A formal model with this property is presented. We argue that information asymmetries do more to explain the kinds of contracts offered by financial mutual than do agency problems between owners, managers, and customers. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Date: 1995
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