Optimal Insurance Contracts under Moral Hazard

摘要

The problem of moral hazard and adverse selection represents an important research issue in insurance theory. In our paper we have shown, through an insurance problem, pitfalls that arise if the convictions of Bayesian decision makers are wrongly represented and we have analyzed their consequences on the theory of insurance, in the presence of moral hazard. Our game theory model is divided into two parts, depending on beliefs and preferences before and after a contract of insurance. One of the main conclusions is that if the insurer does not know the probabilities that represent the true beliefs of the client, its portfolio will consist of a heterogeneous multitude of agents of "high risk" not taking necessary safety measures and agents of "low risk". The result is that a common contract will generate cross-subsidization between the two types of agents. However, on a competitive market, the insurer may reduce its losses through reinsurance.