Moral hazard, insurance, and some collusion

Abstract

We consider a model of insurance and collusion. Efficient risk sharing requires the consumer to get a monetary compensation in case of a loss. But this in turn implies consumer-provider collusion incentives to submit false claims to the insurer. We assume, however, that only some providers are collusive while some are honest, and determine the optimal contract specifying the treatment, the insurance policy and the reimbursement policy to the provider. Two cases are analyzed: the first allows contract menus that induce self-selection among the providers; the second allows contracts consisting of a single policy. In both cases, deterrence of collusion is optimal only if the probability that the provider is collusive is large. When the contract deters collusion, it is as if the provider was collusive with probability one. The first best is achieved only when the provider is honest with certainty. Furthermore, over-consumption of treatment occurs in many cases, and is sometimes used as a substitute for monetary compensation to the consumer.

Expiration Dates in Automobile Insurance Contracts: The Curious Case of Last Policy Month Claims in Taiwan

“…Picard (2000) provides a model in which agents, in charge of marketing channels and not monitored by insurers, might collude with policyholders by offering advantageous contracts to compensate for low promotional efforts. Alger and Ma (2003) show that deterrence of consumer-provider collusion is not optimal unless the probability of collusion is large. Bourgeon et al (2008) examine a theoretical framework to introduce models in which an insurer develops his or her own network of providers to reduce the cost from collusion between policyholders and providers.…”

Does a Monopoly Need to Exclude?

“…8 Erard and Feinstein (1994) argue that "some taxpayers appear to be inherently honest, willing to bear their full tax burden even when faced with financial incentives to underreport their income. Evidence for such inherently honest taxpayers derives not just from casual introspection; it is also supported by econometric evidence and survey findings..." Alger and Ma (1998) advocate a similar view. They maintain that some physicians have stronger ethical views and are not able to exaggerate the medical problems of a patient when requesting coverage from an HMO, while other physicians are willing to do so.…”

Implementation with partial provability

“…3 In particular, we explain how our condition of measurability relates to Maskin's monotonicity and Moore and Repullo's preference reversals in a modified model with an extended outcome space which includes evidence. 4 To further motivate the issues, we present three examples.…”

“…There has been some work that examines communication of verifiable information in the context of mechanism design (Alger and Ma (2003), Watson (2004, 2007), Deneckere and Severinov (2008), Green and Laffont (1986)) and also more recently communication of verifiable information with a mediator (Forges and Koessler (2005)). These papers analyze environments with incomplete information and primarily focus on the question of identifying an appropriate form of the Revelation Principle -that is, when some form of a direct revelation mechanism suffices for achieving an equilibrium with a particular outcome.…”