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Tuesday, August 3 • 10:45am - 12:15pm
4B2 Optimal insurance under moral hazard in loss reduction

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Minha Lee, Sungkyunkwan University; Hangsuck Lee, Sungkyunkwan University; Jimin Hong, Soongsil University

This study investigates the optimal insurance when moral hazard exists in loss reduction. We identify that full insurance is optimal up to a limit and partial insurance is optimal above that limit. For a prudent individual, the indemnity schedule is convex, linear, or concave in the loss in which partial insurance is optimal, depending on the shapes of the utility and loss distribution. The optimal insurance may contain a deductible for large losses only when the indemnity schedule is convex. It may also include a fixed reimbursement when the schedule is convex or concave. When the loss distribution belongs to the linear exponential family, the indemnity schedule is concave under IARA and CARA, whereas it can be concave or convex under DARA.

Discussant
JL

Jean-Gabriel Lauzier

Bocconi University

Presenters
ML

Minha Lee

Sungkyunkwan University



Tuesday August 3, 2021 10:45am - 12:15pm EDT