Lilia Filipova
Monitoring and Privacy in Automobile Insurance Markets with
Moral Hazard
Abstract:
This paper considers moral hazard insurance markets when voluntary
monitoring technologies are available and insureds may choose the
precision of monitoring. Also privacy costs incurred thereby are taken
into account. Two alternative contract schemes are compared in terms of
welfare: (i) monitoring conditional on the loss with only the insurance
indemnities based on the monitoring data, and (ii) unrestricted
monitoring with both the premiums and the indemnities depending on the
data. With any contract scheme some monitoring will be optimal unless
the privacy costs increase too fast in relation to the precision of the
monitoring signal. In the benchmark situation (without privacy costs)
relying completely on both signals (monitoring and the outcome)
informative of effort (ii) maximizes welfare. In the presence of
privacy costs, the contract with conditional monitoring (i) might
dominate the contract which fully includes the outcome and the
monitoring signal into the sharing rule (ii). Apart from the direct
effect of restricting privacy costs only to the state of loss, there
are also an additional indirect incentive and a risk-sharing effect
with this contract. Letting the individuals choose the precision of the
monitoring technology at the time they reveal the data (ex post) is
inefficient with either contract scheme.
JEL: D82, G22
Paper:
Paper available as pdf-file.
Beitrag Nr. 293, Volkswirtschaftliche Diskussionsreihe, Institut
für
Volkswirtschaftslehre der Universität Augsburg
Contact:
Lilia
Filipova,
University
of Augsburg,
Faculty of Business Administration and Economics,
Universitätsstr. 16,
D-86135 Augsburg, Germany, Phone +49-821-598-4314; Fax +49-821-598-4230
E-mail: lilia.filipova@wiwi.uni-augsburg.de
v.
K., 02.07.2007