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Moral Hazard in an Insurance Market and the Optimum Quantity of Money

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  • Shin-ichi Fukuda

Abstract

The purpose of this paper is to investigate the optimal rate of money supply growth when a moral hazard problem in an insurance market makes the risk diversification incomplete. The analysis is based on a simple overlapping generations model of fiat money with idiosyncratic uncertainty. Without a moral hazard problem, no inflationary policy is desirable even if the insurance contract is incomplete. However, when a possibility of the insured to shirk makes the insurance contract incomplete, some moderate inflation policy may enhance each individual's utility, althourh hyperinflation is still harmful. The reason is that inflation which reduces real balances is more costly for the shirking individual than the non-shirking individual. Thus, to the extent that insurance companies attempt to induce their customers not to shirk, increasing the inflation rate can increase the amount of insurance and reduce idiosyncratic risks in the economy.

Suggested Citation

  • Shin-ichi Fukuda, 1995. "Moral Hazard in an Insurance Market and the Optimum Quantity of Money," Discussion Paper Series a304, Institute of Economic Research, Hitotsubashi University.
    • Handle: RePEc:hit:hituec:a304
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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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