The Basic Analytics of Moral Hazard

Abstract

This paper develcçs the basic analytica of noral hazard, for the two-a.itcxziecase where either a fixed damage accident oirs or it does riot.The analysis focuses on the relationship between the insurance premium paid ar the insurance benefits received in the event of an accident, ar is corducted in benefit-premium space.The central massage of the paper is that even when the urd.erlyirg functions, the expected utility function ard the function relatim the accident prthability to accident-prevention effort, are extrQly well-behaved, the irdifference curves ard feasibility set (the set of insurance contracts which at least break even) are not-irdifference curves need not be convex arxl feasibility sets never are; price-ard incczeconsunption lines may be discontinucus; ard effort is not in general a ircriotonic or continucus function of the paramaters of the insurance policies provided.Part I of this paper establishes these results, while Part II discusses scm of their iirplications.The bad behavior of irdifference curves ard the feasibility set profirdly affects the nature ard existence of cxxpetitive &iuilibrium.We illustrate this, thcxzh we do not provide a thorough analysis.We also show that cxir canonical nodel of an insurance market with noral hazard can be reinterpreted to provide a nodel of loans with bankruptcy, or of work incentives.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 195 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.