Limited Liability, Moral Hazard and Risk Taking - A Safety Net Game Experiment

Tibor Neugebauer and Sascha Füllbrunn ()

LSF Research Working Paper Series from Luxembourg School of Finance, University of Luxembourg

Abstract: Safety nets may reduce incentives to mitigate risks, and adversely affect people’s behavior. We model the safety net problem as a social dilemma game involving moral hazard, risk taking and limited liability. Individuals take costly measures to avoid a likely loss which, if incurred, is collectively indemnified. The situation is compared to a situation with full liability and the deterministic benchmark, i.e. the public goods game. We report experimental results. The data show that limited " liability leads to higher risk taking in comparison to full liability; however, the" difference is much smaller than predicted by theory. In comparison to the deterministic benchmark, individuals take higher loss avoidance levels. We attribute this effect to social responsibility since subjects behave as if they were liable for the losses they impose on the group. With repetition, the experimental data indicate a gradual emergence of the moral hazard problem in safety nets.

Keywords: Experiment; social safety net; moral hazard; linear public goods game; hidden action (search for similar items in EconPapers)
JEL-codes: C9 D7 D8 H4 I1 I3 (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-cbe, nep-cta, nep-exp and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: LIMITED LIABILITY, MORAL HAZARD, AND RISK TAKING: A SAFETY NET GAME EXPERIMENT (2013)
Working Paper: Limited Liability, Moral Hazard and Risk Taking A Safety Net Game Experiment (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:crf:wpaper:10-04

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