Optimal Insurance Contracts When Establishing The Amount of Losses is Costly

Louis Kaplow

No 4290, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The problem of establishing the amount of losses covered by public and private insurance is often characterized by asymmetric information, in which the claimant already knows the extent of a loss but this can be demonstrated to the insurer only at a cost. It is shown that a simple arrangement, which provides greater coverage whenever individuals demonstrate unusually high losses, gives claimants an excessive incentive to establish the amount of their losses. This paper determines what insurance claims process, consistent with the form typically employed in existing insurance arrangements, is optimal.

JEL-codes: D82 K41 (search for similar items in EconPapers)
Date: 1993-03
Note: LE
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Published as The Geneva Papers on Risk and Insurance Theory, vol. 19, no. 2, pp. 139-152, December 1994
Published as Louis Kaplow, 1994. "Optimal Insurance Contracts When Establishing the Amount of Losses Is Costly," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 19(2), pages 139-152, December.

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Journal Article: Optimal Insurance Contracts When Establishing the Amount of Losses Is Costly (1994)
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