NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Optimal Insurance Contracts When Establishing The Amount of Losses is Costly

Louis Kaplow

NBER Working Paper No. 4290 (Also Reprint No. r2030)
Issued in March 1993
NBER Program(s):   LE

The problem of establishing the amount of losses covered by public and private insurance is often characterized by asymmetric information, in which the claimant already knows the extent of a loss but this can be demonstrated to the insurer only at a cost. It is shown that a simple arrangement, which provides greater coverage whenever individuals demonstrate unusually high losses, gives claimants an excessive incentive to establish the amount of their losses. This paper determines what insurance claims process, consistent with the form typically employed in existing insurance arrangements, is optimal.

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Document Object Identifier (DOI): 10.3386/w4290

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