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Moral hazard and optimal insurance contract with a continuum effort

Author

Listed:
  • Niousha Shahidi

    (EDC Paris Business School)

Abstract

In the research works, moral hazard is usually represented in two natural states (accident and no accident). In this case, the determination of the optimal contract could be made graphically. The mathematicaing is become more complicated when we consider infinite natural states and efforts under the monotone likelihood ratio property. In fact, the particular form of incentive constraints introduces a non-convex problem. In this paper, under technical conditions we show that the non-convex problem has a solution which is a new result and we determine the optimal contract such that the optimal wealth of the insured is a non-increasing function of the loss.

Suggested Citation

  • Niousha Shahidi, 2014. "Moral hazard and optimal insurance contract with a continuum effort," Economics Bulletin, AccessEcon, vol. 34(3), pages 1350-1360.
    • Handle: RePEc:ebl:ecbull:eb-13-00782
    as

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    References listed on IDEAS

    as
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    3. Page, Frank Jr., 1987. "The existence of optimal contracts in the principal-agent model," Journal of Mathematical Economics, Elsevier, vol. 16(2), pages 157-167, April.
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    More about this item

    Keywords

    insurance; moral hazard; optimal contract; non-convex problem; non-increasing rearrangement;
    All these keywords.

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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