Absence Of Moral Hazard Research Articles

Optimal Bargaining and Moral Hazard

In this paper we attempt to find the answer to the question of how the professional boxers behave ex post to additional money share negotiated ex ante. We find that for each fighter under a certain stake threshold there is an incentive to put in huge efforts for the forthcoming fight and that above that threshold, the opposite is true leading to a phenomenon of moral hazard. We also find that bargaining is successful in the absence of moral hazard. Finally, the optimal effort of the fighter will increase (decrease) for his (his opponents’) additional outside option.

Input Use under Crop Insurance: The Role of Actual Production History

AbstractThe impact of crop insurance on changes in input use has attracted much attention by economists. While there are a number of studies on this topic, they frame moral hazard in inputs use in a static model. However, when agricultural producers are forward‐looking, they would make input allocation decisions realizing that their decisions would affect their future actual production history. This, in turn, affects the probability and size of future indemnity payments. Thus, moral hazard should be framed in a dynamic input use decision model. We first show theoretically that under certain feasible conditions, a static analysis always results in lower optimal input use when compared to a dynamic one with endogenous actual production history. This is because static models fail to recognize the role of actual production history. We then run numerical simulations using nitrogen application rates as a case study. We find that static models indicate significant reduction in nitrogen use compared to the no‐insurance scenario, whereas the dynamic models with a role for actual production history indicate almost no reduction in applied nitrogen. The dynamic analysis not only suggests a near absence of moral hazard, but, for low coverage rates, it results in an optimal nitrogen rate higher than that under the no‐insurance scenario. These findings illustrate the importance of recognizing the role of actual production history in mitigating moral hazard possibilities in crop insurance and the dynamic nature of moral hazard in crop insurance.

Self-control and the rise and fall of factory discipline

We propose a dynamic general equilibrium model that accounts for the historical pattern of the rise and fall of factory discipline in the course of economic development. Firms have two alternative means to increase work effort: discipline and control vs. monetary incentives. A key ingredient of our model lies in the fact that workers suffer from present-bias. We show that this lack of self-control makes discipline relatively cheap when workers' outside option is low even in the absence of moral hazard. Then, as one economy develops, it endogenously goes through three stages where firms successively use low-powered monetary incentives, factory discipline and then high-powered monetary incentives. When moral hazard is introduced, multiple development paths may emerge.

Loss aversion leading to advantageous selection

Some insurance markets are characterized by “advantageous selection”, that is, ex-post risk and coverage are negatively correlated. We show that expectation-based loss aversion as in Kőszegi and Rabin (Quarterly Journal of Economics, 121(4), 1133–1165, 2006; The American Economic Review, 97(4), 1047–1073, 2007) provides a natural explanation for this phenomenon in environments in which risk aversion models do not, e.g., when agents face modest-scale risks and/or in absence of moral hazard. More exposure to risk has two competing effects on an agent’s willingness to pay for insurance: a positive effect, as in standard expected utility models; and a negative one, due to a reference effect. We determine conditions under which an insurance provider optimally sets a high price at which only low risk agents buy.

Effects of Eurobonds: A stochastic sovereign debt sustainability analysis for Portugal, Ireland and Greece

This paper assesses the impact of Eurobonds on sovereign debt dynamics for selected European member states (Greece, Ireland and Portugal). For each member state, we produce sovereign debt fan charts of (i) a baseline scenario (no Eurobonds) and (ii) a Full-Fledged Eurobond introduction. The key building blocks of our methodology are (i) a debt framework (which embeds the traditional recursive debt equation), (ii) a vector autoregressive model to take into account and parametrise macroeconomic uncertainty and (iii) a fiscal reaction function. Conditional on the absence of moral hazard, we find Eurobonds to be a good instrument to absorb macroeconomic shocks and to diminish uncertainty over future debt forecasts; for Ireland and Portugal, we find debt to be 20 percentage points lower than under our baseline scenario, by 2020.

Tax Deductions for Losses and Equilibrium in Competitive Insurance Markets

This paper examines how tax deductions related to uninsured personal losses may be Pareto-improving if there are inefficiencies in insurance markets in the context of adverse selection by including individuals with different risk types. In the absence of moral hazard, we provide a positive view of loss deduction policies by showing that they more easily reach a separating equilibrium than does the free market in the Rothschild and Stiglitz equilibrium concept.

The Optimal Level of Deposit Insurance Coverage

This paper develops a global game model that allows for a rigorous analysis of partial deposit insurance and provides the first comparative statics of the optimal level of deposit coverage. The optimal amount of coverage increases with lower bank liquidity requirements, with a higher precision of depositors’ information, and with a lower relevance of large, uninsured creditors, and it should not be increased in anticipation of an economic downturn. Optimal insurance is higher if there is contagion and lower if banks can assume excessive risk, but interestingly, a high level of coverage may not be optimal even in the absence of moral hazard on the part of banks. The model supports the inauguration of coinsurance provisions and is applied to compare various policies addressing financial fragility. While an optimal lending of last resort policy can outperform deposit insurance, anticipated bailouts are inferior in terms of welfare. Capital requirements are not a substitute for insurance, but mitigate excessive risk taking.

Do Optional Deductibles Reduce the Number of Doctor Visits? Empirical Evidence with German Data

Deductibles in health insurance are often regarded as a means to contain health care costs when individuals exhibit moral hazard. However, in the absence of moral hazard, voluntarily chosen deductibles may instead lead to self-selection into different insurance contracts. We use a set of new variables in the German Socioeconomic Panel for the years 2002, 2004, and 2006 that measure individual health more accurately and include risk-attitudes towards health in order to determine the price elasticity of demand for health care. A latent class approach that takes into account the panel structure of the data reveals that the effect of deductibles on the number of doctor visits is negligible. Private add-on insurance increases the number of doctor visits. However, altogether the effects of the insurance state on the demand for doctor visits are small in magnitude.

Do Optional Deductibles Reduce the Number of Doctor Visits? Empirical Evidence with German Data

Deductibles in health insurance are often regarded as a means to contain health care costs when individuals exhibit moral hazard. However, in the absence of moral hazard, voluntarily chosen deductibles may instead lead to self-selection into different insurance contracts. We use a set of new variables in the German Socioeconomic Panel for the years 2002, 2004, and 2006 that measure individual health more accurately and include risk-attitudes towards health in order to determine the price elasticity of demand for health care. A latent class approach that takes into account the panel structure of the data reveals that the effect of deductibles on the number of doctor visits is negligible. Private add-on insurance increases the number of doctor visits. However, altogether the effects of the insurance state on the demand for doctor visits are small in magnitude.

Taxation of uncertain business profits, private risk markets and optimal allocation of risk

In this paper we explore what happens if the government bears some of the risk through a profit tax when the risk sharing in the venture capital market is incomplete due to non-observability of effort and moral hazard. If the external equity investors can enforce exclusive contracts with the entrepreneurs, the risk relief through a profit tax will lead to too much insurance and too low effort as compared with a second best optimal solution. Bond and Devereux [Bond, S.R. and Devereux, M.P. (1995). On the design of a neutral business tax under uncertainty. Journal of Public economics, 58, 57–71.] show that a proportional profit tax would be neutral in the absence of moral hazard. In the presence of moral hazard we demonstrate that the tax may affect the risk shifting through the market, in which case the premise for the neutrality result will no longer hold.

On Compulsory Per-Claim Deductibles in Automobile Insurance

The purposes of this paper are to analyze the theoretical characteristics of the compulsory deductible system and to verify the rationality of an increasing per-claim deductible in automobile insurance. We derive the optimal variable per-claim deductible by assuming the insurers are financially balanced and the expected utility of the insured is maximized in the absence of moral hazard. Our result suggests that a variable per-claim deductible increasing with the number of claims per year is not optimal. Instead, deductibles should be charged in a decreasing rate forming a second-best solution.

Investment Implications of Information Acquisition and Leakage

This paper studies when a firm will acquire additional information about a potential new project by consulting outsiders, when doing so runs the risk of reducing the value of implementing the project as a consequence of information leakage. The analysis evaluates the firm's information acquisition activities in both the presence and absence of moral hazard in project production.

Endogenous formation of competing partnerships with moral hazard

We analyze the formation of competing partnerships as a sequential game with moral hazard within coalitions. In a linear Cournot model, we show that when moral hazard is very severe, no partnerships will form. However, when moral hazard is not too severe, the coalition structure may be more concentrated than it is in the absence of moral hazard. Concerning industry profits, in the absence of moral hazard too many coalitions are formed in equilibrium as compared to the efficient outcome, but moral hazard may be responsible for an inefficiency of opposite sign.

Bank moral hazard and the introduction of official deposit insurance in Canada

It has been long recognized that insured banks can exploit a mispriced risk-independent flat-rate deposit insurance (DI) system by increasing leverage (i.e., decreasing capital ratios) and/or asset risk. Such a behavior is known as moral hazard. There are, however, factors that can induce self-discipline by banks. For instance, charter value is one of such disciplining factors. The presence or absence of moral hazard is, indeed, an empirical issue to be tested in Canada, where DI was first implemented in 1967. This unique event has enabled us to analyze the risk-taking behavior of Canadian commercial banks following the introduction of flat-rate DI. Our results fail to detect the presence of moral hazard in the Canadian banking industry following the introduction of flat-rate DI. We find that the total risk of equity, the market risk, and the implicit volatility of banks' assets increased. Capital ratios also decreased, mainly in book values. However, we find that these manifestations, while necessary for the presence of moral hazard, are not sufficient conditions for inducing risk shifting from banks to the Canada Deposit Insurance Corporation (CDIC). In fact, Canadian chartered banks have adjusted their capitalization in function of their asset risk.

Bank Moral Hazard and the Introduction of Official Deposit Insurance in Canada

It has been long recognized that insured banks can exploit a mispriced risk-independent flat-rate deposit insurance (DI) system by increasing leverage (i.e., decreasing capital ratios) and/or asset risk. Such a behavior is known as moral hazard. There are, however, factors that can induce self-discipline by banks. For instance, charter value is one of such disciplining factors. The presence or absence of moral hazard is, indeed, an empirical issue to be tested in Canada, where DI was first implemented in 1967. This unique event has enabled us to analyze the risk-taking behavior of Canadian commercial banks following the introduction of flat-rate DI. Our results fail to detect the presence of moral hazard in the Canadian banking industry following the introduction of flat-rate DI. We find that the total risk of equity, the market risk, and the implicit volatility of banks' assets increased. Capital ratios also decreased, mainly in book values. However, we find that these manifestations, while necessary for the presence of moral hazard, are not sufficient conditions for inducing risk-shifting from banks to the Canada Deposit Insurance Corporation (CDIC). In fact, Canadian chartered banks have adjusted their capitalization in function of their asset risk.

Endogenous Specialisation and Endogenous Principal‐agent Relationship

The paper develops a general equilibrium model with endogenous principal‐agent relationship within a framework of consumer‐producer, economies of specialisation, and transaction costs. It is shown that if transaction efficiency is low, then autarky is chosen as the general equilibrium where no market and principal‐agent relationship exists. As transaction efficiency is improved, the equilibrium level of division of labour increases, comparative advantage between ex ante identical individuals emerges from the division of labour, and the number of principal‐agent relationships increases. The following features of the model distinguish it from other principal‐agent models in the literature. The principal‐agent relationships are not only endogenous, but also reciprocal between different specialists. In a general equilibrium environment, choice between pure pricing and contingent pricing is endogenised. In the paper, the implications of endogenous transaction costs caused by moral hazard for the equilibrium extent of the market and related degrees of market integration, production concentration, trade dependence, diversity of economic structure, and productivity are explored. The model predicts two interesting phenomena: a man might work harder for the market with moral hazard than working for himself in the absence of moral hazard; a market with moral hazard might be Pareto superior to autarky with no moral hazard.

More Than Cost Shifting: Moral Hazard Lowers Productivity

MORAL HAZARD AND WORKPLACE ABSENTEEISM Moral arises whenever the difficult-to-monitor activities of workplace participants, who are protected by disability systems, increase the insurance liability of firms' owners. The owners of profit-maximizing firms would like to write enforceable contracts that make the whole disability process objective in the sense that it provides only the appropriate level of medical care. Of course, such contracts are difficult and therefore costly to monitor. Hence, the costs of monitoring workers, administrators, and health care providers reduce the amount of monitoring that firms would undertake in a full information world. Those participating in the disability process realize that this informational asymmetry exists and can turn the situation to their advantage. Moral increases workplace absenteeism when such informational asymmetries are used to increase the frequency or duration of workers' compensation claims. These additional are known as hazard because the costs of extra usage (above that in a full information world) are borne by all the workers and owners of the company indirectly through higher cost for health and insurance benefits (with offsetting reductions in wages(1) and possibly company profitability), while the benefits are captured by individual participants. Unfortunately, since all face the same situation, individuals have some incentive to use the system more than they would have if they were paying with their own money, or if their behavior could be monitored without cost. Overwhelmingly, the extant literature indicates that workers respond to economic incentives provided by workers' compensation disability payments.(2) In the absence of moral hazard, a change in benefits would not cause a systematic change in the claims. However, claim severity and frequency tend to increase as benefits increase and as the waiting period prior to the receipt of wage benefits (a de facto deductible) falls.(3) Despite this evidence, the potential impact of moral on real productivity has been ignored because moral is primarily seen as a change in the incentive to report an accident, shifting costs from one type of employee benefit to another. For example, an employee may claim that a given condition arose from a job injury and seek workers' compensation benefits because their real health condition (broadly defined) does not qualify for short-term disability compensation. An extreme case of claims reporting moral is overt fraud in which a worker facing a pending layoff injury benefits when no injury was incurred, either on or off the job. In both of these examples, employee shift costs: in the first case, costs are shifted between group health/paid sick time and workers' compensation medical/indemnity; and in the second case, costs are shifted between unemployment insurance and workers' compensation indemnity. While such benefits-induced cost-shifting may not have much impact on real output, increased workplace absenteeism will lower output to the extent that the firm specific capital is important. As statutory benefits increase, absenteeism rises with a concomitant loss of firm specific capital. This loss in firm specific capital causes output to fall. While firm-specific capital can not be directly observed and estimated, the impact of lost firm-specific capital on output can be inferred indirectly. Since higher statutory benefits increase absenteeism (see prior research cited in footnote 3), evidence that higher statutory benefits also lower output provides indirect evidence on the importance of lost, firm-specific capital. This paper measures changes in output as statutory benefits rise by embedding the benefits replacement rate in a Cobb-Douglas production function. In the next section, prior research on the importance of firm specific capital is discussed. In the third section, the effect of higher disability pay on value-added in manufacturing, using an industry longitudinal sample, is estimated. …

Repeated auctions of franchises for nonrenewable resources

In maximizing the net total government take from exploitation of nonrenewable natural resource endowments, the government faces the problem that extraction companies possess private information about extraction capacities (adverse selection). In a repeated auctions model, I show that it is optimal to deviate from bidding parity, even in the absence of moral hazard. The second period auction is biased to mitigate the externality problem that stems from intertemporal dynamics in extraction costs.

Constrained Suboptimality in Economies With Limited Communication

Economies with limited communication contain an externality which typically makes them Pareto inefficient, even taking into account the communication con­straints agents face. In a two period model it is shown that an open and dense set of economies with limited communication are constrained Pareto suboptimal. Thus equilibria of economies with voluntary unemployment, search, or other types of limits on communication are unlikely to be Pareto optimal, even in the absence of moral hazard, adverse selection, or search externalities.

The Role of Unemployment Insurance in an Economy with Liquidity Constraints and Moral Hazard

The potential welfare benefits of unemployment insurance, along with the optimal replacement ratio, are studied using a quantitative dynamic general equilibrium model. To provide a role for unemployment insurance, agents in our economy face exogenous idiosyncratic employment shocks and are unable to borrow or insure themselves through private markets. In the absence of moral hazard, replacement ratios as high as .65 are optimal and the welfare benefits of unemployment insurance are quite large. However, if there is moral hazard and the replacement ratio is not set optimally, but is instead set to an empirically plausible value, the economy can be much worse off than it would be without unemployment insurance.