The Basic Analytics of Moral Hazard

Stiglitz, Joseph E.; Arnott, Richard J.

The basic analytics of moral hazard are developed using the simplest possible model of the insurance market. Even when the underlying expected utility function and the function relating the accident probability to accident-prevention effort are extremely well behaved, the indifference curves and feasibility set (the set of insurance contracts which at least break even) are not -- indifference curves need not be convex and feasibility sets never are; price-and income-consumption lines may be discontinuous; and effort is not in general a monotonic or continuous function of the parameters of the insurance policies provided.



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Scandinavian Journal of Economics

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April 25, 2013