An Essay on the Subjective Valuation of an Incentive System in an Insurance Market
This study discusses two discount systems, namely, the insurance pre- mium discount system, where the policyholder’s valuation is objective, and the book price discount system, where the policyholder’s valuation is subjective. The main pur- pose of this study is to compare these discount systems and show the conditions under which each discount system is chosen by an insurance firm.
The main conclusions of this study are as follows. First, the insurance firm chooses the book price discount (insurance premium discount) system if the policyholder’s disutility of loss prevention effort is relatively high (low). Second, the insurance firm chooses the book price discount system when the initial wealth and maximum subjec- tive valuation of the book price discount are large. The insurance firm also chooses the book price discount system when the insurance premium, the amount of damage and effect of the loss prevention effort are small.
Grossman, S. J. and O. D. Hart (1983). An Analysis of the Principal-agent Problem.
Econometrica 51 (1), 7–45.
H¨olmstrom, B. (1979). Moral Hazard and Observability. Bell Journal of Eco- nomics 10, 74–91.
H¨olmstrom, B. and P. Milgrom (1991). Multitask Principal-agent Analyses: Incentive Contracts, Asset Ownership, and Job Design. Journal of Law, Economics, and Organization 7, 24–52.
Rubinstein, A. and M. E. Yaari (1983). Repeated Insurance Contracts and Moral
Hazard. Journal of Economic Theory 30 (1), 74–97.
Shavell, S. (1979). On Moral Hazard and Insurance. Quarterly Journal of Eco- nomics 93 (4), 541–562.
The Copyright Transfer Form to ASERS Publishing (The Publisher)
This form refers to the manuscript, which an author(s) was accepted for publication and was signed by all the authors.
The undersigned Author(s) of the above-mentioned Paper here transfer any and all copyright-rights in and to The Paper to The Publisher. The Author(s) warrants that The Paper is based on their original work and that the undersigned has the power and authority to make and execute this assignment. It is the author's responsibility to obtain written permission to quote material that has been previously published in any form. The Publisher recognizes the retained rights noted below and grants to the above authors and employers for whom the work performed royalty-free permission to reuse their materials below. Authors may reuse all or portions of the above Paper in other works, excepting the publication of the paper in the same form. Authors may reproduce or authorize others to reproduce the above Paper for the Author's personal use or for internal company use, provided that the source and The Publisher copyright notice are mentioned, that the copies are not used in any way that implies The Publisher endorsement of a product or service of an employer, and that the copies are not offered for sale as such. Authors are permitted to grant third party requests for reprinting, republishing or other types of reuse. The Authors may make limited distribution of all or portions of the above Paper prior to publication if they inform The Publisher of the nature and extent of such limited distribution prior there to. Authors retain all proprietary rights in any process, procedure, or article of manufacture described in The Paper. This agreement becomes null and void if and only if the above paper is not accepted and published by The Publisher, or is with drawn by the author(s) before acceptance by the Publisher.