Moral Hazard in an Insurance Market and the Optimum Quantity of Money

Shin-ichi Fukuda ()

Discussion Paper Series from Institute of Economic Research, Hitotsubashi University

Abstract: The purpose of this paper is to investigate the optimal rate of money supply growth when a moral hazard problem in an insurance market makes the risk diversification incomplete. The analysis is based on a simple overlapping generations model of fiat money with idiosyncratic uncertainty. Without a moral hazard problem, no inflationary policy is desirable even if the insurance contract is incomplete. However, when a possibility of the insured to shirk makes the insurance contract incomplete, some moderate inflation policy may enhance each individual's utility, althourh hyperinflation is still harmful. The reason is that inflation which reduces real balances is more costly for the shirking individual than the non-shirking individual. Thus, to the extent that insurance companies attempt to induce their customers not to shirk, increasing the inflation rate can increase the amount of insurance and reduce idiosyncratic risks in the economy.

JEL-codes: D82 E31 E52 (search for similar items in EconPapers)
Date: 1995-01
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Persistent link: https://EconPapers.repec.org/RePEc:hit:hituec:a304

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