Moral hazard, monitoring costs, and optimal government intervention

✍ Scribed by Neil Bruce; Kar-Yiu Wong

• Publisher: Springer
• Year: 1996
• Tongue: English
• Weight: 879 KB
• Volume: 12
• Category: Article
• ISSN: 0895-5646
• DOI: 10.1007/bf00353332

✦ Synopsis

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.