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
Language
English
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