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Limited Liability, Moral Hazard and Risk Taking - A Safety Net Game Experiment

Author

Listed:
  • Tibor Neugebauer

    (Luxembourg School of Finance, University of Luxembourg)

  • Sascha Füllbrunn

    (Luxembourg School of Finance, University of Luxembourg)

Abstract

Safety nets may reduce incentives to mitigate risks, and adversely affect people’s behavior. We model the safety net problem as a social dilemma game involving moral hazard, risk taking and limited liability. Individuals take costly measures to avoid a likely loss which, if incurred, is collectively indemnified. The situation is compared to a situation with full liability and the deterministic benchmark, i.e. the public goods game. We report experimental results. The data show that limited liability leads to higher risk taking in comparison to full liability; however, the difference is much smaller than predicted by theory. In comparison to the deterministic benchmark, individuals take higher loss avoidance levels. We attribute this effect to social responsibility since subjects behave as if they were liable for the losses they impose on the group. With repetition, the experimental data indicate a gradual emergence of the moral hazard problem in safety nets.

Suggested Citation

  • Tibor Neugebauer & Sascha Füllbrunn, 2010. "Limited Liability, Moral Hazard and Risk Taking - A Safety Net Game Experiment," LSF Research Working Paper Series 10-04, Luxembourg School of Finance, University of Luxembourg.
  • Handle: RePEc:crf:wpaper:10-04
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    References listed on IDEAS

    as
    1. Di Mauro, Carmela, 2002. "Ex ante and ex post moral hazard in compensation for income losses: results from an experiment," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 31(3), pages 253-271.
    2. Simon Gächter & Manfred Königstein, 2009. "Design a Contract: A Simple Principal-Agent Problem as a Classroom Experiment," The Journal of Economic Education, Taylor & Francis Journals, vol. 40(2), pages 173-187, April.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Staněk, Rostislav & Krčál, Ondřej & Čellárová, Katarína, 2022. "Pull yourself up by your bootstraps: Identifying procedural preferences against helping others in the presence of moral hazard," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 98(C).
    2. Wang, Jian & Iversen, Tor & Hennig-Schmidt, Heike & Godager, Geir, 2017. "How Changes in Payment Schemes Influence Provision Behavior," HERO Online Working Paper Series 2017:2, University of Oslo, Health Economics Research Programme.
    3. Gortner, Paul & Massenot, Baptiste, 2020. "Leverage and Bubbles: Experimental Evidence," SAFE Working Paper Series 239, Leibniz Institute for Financial Research SAFE, revised 2020.

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    More about this item

    Keywords

    Experiment; social safety net; moral hazard; linear public goods game; hidden action;
    All these keywords.

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • H4 - Public Economics - - Publicly Provided Goods
    • I1 - Health, Education, and Welfare - - Health
    • I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty

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