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Moral Hazard, Monitoring Costs, and Optimal Government Intervention

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  • Bruce, Neil
  • Wong, Kar-yiu

Abstract

When insurance firms can monitor with non-prohibitive costs the consumption of risk-influencing goods by an insured, they have incentives to tax-subsidize the insured's consumption of the goods. If the government cannot monitor at a lower cost than private insurers, intervention is neither needed nor desirable. Where the government does have a monitoring-cost advantage, it cannot achieve a constrained optimum by commodity tax-subsidies alone. It must also augment the level of insurance and, in some cases, prohibit private tax-subsidies by insurers. Such "invasive" intervention can be avoided if the government regulates the consumption of the risk-influencing goods. Copyright 1996 by Kluwer Academic Publishers

Suggested Citation

  • Bruce, Neil & Wong, Kar-yiu, 1996. "Moral Hazard, Monitoring Costs, and Optimal Government Intervention," Journal of Risk and Uncertainty, Springer, vol. 12(1), pages 77-90, January.
    • Handle: RePEc:kap:jrisku:v:12:y:1996:i:1:p:77-90
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    Cited by:

    1. Gregory DeAngelo & Taylor Leland Smith, 2020. "Private security, maritime piracy and the provision of international public safety," Journal of Risk and Uncertainty, Springer, vol. 60(1), pages 77-97, February.

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