Outsourcing Regulation: How Insurance Reduces Moral Hazard
University of Chicago Law School
Kyle D. Logue
University of Michigan Law School
November 1, 2012
Michigan Law Review, Vol. 111, No. 2, 2012
U of Michigan Law & Econ Research Paper No. 12-004
University of Chicago Institute for Law & Economics Olin Research Paper No. 593
This article explores the potential value of insurance as a substitute for government regulation of safety. Successful regulation of behavior requires information in setting standards, licensing conduct, verifying outcomes, and assessing remedies. In some areas, the private insurance sector has technological advantages in collecting and administering the information relevant to setting standards, and could outperform the government in creating incentives for optimal behavior. The paper explores several areas in which regulation and other government-oriented forms of control are replaced by private insurance schemes. The role of the law diminishes to the administration of simple rules of absolute liability or of no liability, and affected parties turn to insurers for both risk coverage and safety instructions. The paper illustrates the existing role of regulation-through-insurance in various areas of risky activity, and then explores its potential application in additional, yet unutilized, areas: (1) consumer protection; (2) food safety; and (3) financial statements.
Number of Pages in PDF File: 53
Date posted: April 11, 2012 ; Last revised: September 17, 2013
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