Business Economics and Public Policy Papers

Document Type

Working Paper

Date of this Version

4-2005

Publication Source

Risk Theory Conference,2005

Abstract

Insurance markets are proving to be a fruitful area for empirical work on contract theory. Since much of the theoretical work on contracts is motivated by moral hazard and adverse selection, insurance seems a natural product on which to study the impact that private information and unobservable actions have on contract terms and performance. While several theoretical papers incorporate repeated contracting over time (see Chiappori, 2000, for a review), empirical research has yet to fully address the repeated nature of insurance contracting (Chiappori and Heckman, 2002, and Cohen, 2002, are exceptions). Many insurance purchases are quite persistent over time (Nini, 2004, documents significant persistence in auto insurance). With short-term contracts and repeated interactions, ex-post moral hazard becomes important as consumers have strategic incentives to prevent the revelation of potentially costly information. This is particularly true for drivers involved in a auto accident: making a claim provides valuable indemnification yet reveals information that may lead to future premium increases.

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Date Posted: 27 November 2017