Moral Hazard in Insurance: Theory and Evidence from a Credit Reform in Ghana

Abstract

Helping individuals to buy insurance coverage in developing countries, for instance by allowing them to buy insurance on credit, may not necessarily be welfare improving. Using rich administrative data on auto-insurance market in Ghana, and a policy reform that led to sizable reduction in demand by disallowing individuals to buy insurance on credit, I provide non-parametric evidence for the existence of moral hazard and recover lower bounds on the costs it imposes in this market. My estimates imply the moral hazard gains reach 12% of firm profits and may largely outweigh gains in consumer surplus from the increased insurance coverage.