Title

Optimal insurance under costly falsification and costly, inexact verification

Document Type

Journal article

Source Publication

Journal of Economic Dynamics and Control

Publication Date

5-1-2008

Volume

32

Issue

5

First Page

1680

Last Page

1700

Keywords

Claim falsification, Inexact verification, Optimal indemnity schedule, Optimal insurance contract, Revelation principle

Abstract

This paper integrates the often dichotomized models of costly state verification and costly claim falsification. It is found that when verification is inexact, it is possible for an optimal insurance contract to consist of both positive claim falsification and positive insurer verification, provided that falsification cost and verification cost are sufficiently low, and the insured is risk-averse satisfying constant absolute risk aversion. This result certainly contrasts with the common belief that falsification and verification are mutually exclusive in an optimal insurance contract. Some characteristics of the optimal falsification, verification, and indemnification profiles, including implementability, are analyzed.

DOI

10.1016/j.jedc.2007.06.014

Print ISSN

01651889

Publisher Statement

Copyright © 2007 Elsevier B.V. All rights reserved. Access to external full text or publisher's version may require subscription.

Full-text Version

Publisher’s Version

Recommended Citation

Hau, A. (2008). Optimal insurance under costly falsification and costly, inexact verification. Journal of Economic Dynamics and Control, 32(5), 1680-1700. doi: 10.1016/j.jedc.2007.06.014

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