Optimal insurance under costly falsification and costly, inexact verification

Arthur HAU

Research output: Journal PublicationsJournal Article (refereed)

3 Citations (Scopus)

Abstract

This paper integrates the often dichotomized models of costly state verification and costly claim falsification. It is found that when verification is inexact, it is possible for an optimal insurance contract to consist of both positive claim falsification and positive insurer verification, provided that falsification cost and verification cost are sufficiently low, and the insured is risk-averse satisfying constant absolute risk aversion. This result certainly contrasts with the common belief that falsification and verification are mutually exclusive in an optimal insurance contract. Some characteristics of the optimal falsification, verification, and indemnification profiles, including implementability, are analyzed.
Original languageEnglish
Pages (from-to)1680-1700
Number of pages21
JournalJournal of Economic Dynamics and Control
Volume32
Issue number5
Early online date17 Jul 2007
DOIs
Publication statusPublished - May 2008

Keywords

  • Claim falsification
  • Inexact verification
  • Optimal indemnity schedule
  • Optimal insurance contract
  • Revelation principle

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