Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/171133
Authors: 
Bourgeon, Jean-Marc
Picard, Pierre
Year of Publication: 
2017
Series/Report no.: 
CESifo Working Paper 6669
Abstract: 
The standard economic analysis of the insured-insurer relationship under moral hazard postulates a simplistic setup that hardly explains the many features of an insurance contract. We extend this setup to include the situation that the insured was facing at the time of the accident and the circumstances of the loss. We show that if this information is costlessly observable, then it should be included in the contract to improve the risk sharing-incentive trade-off under moral hazard. However, in practice the insurer observes the circumstances of the loss only in particular cases - most of the time by performing a costly audit - and almost never the situation the insured was facing at the time of the accident. The resulting incompleteness of the contract opens the door to controversies and disputes that may lead to judicial procedures. We show how the law of insurance contracts should allow insurers to incentivize policyholders to exert an adequate level of effort, and, at the same time, to limit their propencity to nitpick.
Subjects: 
insurance
moral hazard
incomplete contracts
JEL: 
D82
D86
G22
Document Type: 
Working Paper

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